-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FNoRQ5IOXlBtkpgJ4VrC8P5fr6Wen/et6733uMfUcBGIgQ9inQT70T+OQPJskmWl +uBiyo+f9+DrUWcXpMecqQ== 0000889812-97-002389.txt : 19971113 0000889812-97-002389.hdr.sgml : 19971113 ACCESSION NUMBER: 0000889812-97-002389 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970731 FILED AS OF DATE: 19971113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PURETEC CORP CENTRAL INDEX KEY: 0000928451 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS PLASTIC PRODUCTS [3080] IRS NUMBER: 223376449 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26508 FILM NUMBER: 97715400 BUSINESS ADDRESS: STREET 1: 65 RAILROAD AVE CITY: RIDGFIELD STATE: NJ ZIP: 07657 BUSINESS PHONE: 2019416550X109 MAIL ADDRESS: STREET 1: 65 RAILROAD AVE CITY: RIDGEFIELD STATE: NJ ZIP: 07657 10-K 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K -------------------------------------------- (Mark One) /X/ Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) for the fiscal year ended July 31, 1997 / / Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) for the transition period from _____ to _____ Commission File Number 0-26508 PURETEC CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 22-3376449 - ------------------------ ------------------------------------ (State of Incorporation) (I.R.S. Employer Identification No.) 65 Railroad Avenue, Ridgefield, New Jersey 07657 ----------------------------------------------------- (Address of principal executive offices and zip code) (201) 941-6550 ---------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock (par value $.01 per share) --------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the registrant's classes of stock as of the latest practicable date. Class Outstanding at November 13, 1997 - ---------------------------- -------------------------------- Common Stock, $.01 par value 31,240,866 The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $95,675,152 as of November 13, 1997. Documents Incorporated by Reference: See Index to Exhibits. Item 1. BUSINESS Introduction PureTec Corporation ("PureTec" or the "Company") was formed as the result of a merger (accounted for as a merger), effective as of July 31, 1995, between the former Pure Tech International, Inc. and the significantly larger Ozite Corporation ("Ozite"). Subsequently, in August 1995, PureTec acquired a specialty vinyl resin plant from Occidental Chemical Corporation. The combination of these three entities constitutes the active business operations of PureTec Corporation. At the time of the merger, the legal name of the former Pure Tech International, Inc. was changed to PTI Plastic, Inc. ("PTIP"). For financial reporting purposes, most of the historical financial information reported in this Form 10-K regarding the Company for fiscal years prior to 1996 is that of PTIP. Prior to the merger, PTIP's principal businesses were the recycling of glass, metals and plastics and the thermoplastic molding of custom parts using both recycled and virgin materials. PTIP discontinued and sold its glass and metal recycling and Material Recovery Facility ("MRF") operations during fiscal 1994 and 1995. PureTec discontinued and sold its thermoplastic molding operations ("Styrex Industries") during fiscal 1997. Prior to the merger, Ozite's principal businesses were the manufacturing of hoses, tubing, and vinyl compounds. These operations now constitute the major portion of PureTec's operations and product lines. The Company discontinued the manufacturing of Ozite's non-woven textile products and sold the related assets effective January 31, 1996. As discussed in Note 18 to the Company's Financial Statements, on November 11, 1997 the Company entered into a Merger Agreement with Tekni-Plex, Inc. ("Tekni-Plex"). Subject to the approval of a majority of the shareholders at a shareholders' meeting that the Company will arrange, the Merger Agreement contemplates Tekni-Plex (i) purchasing all of the Company's outstanding Common Stock for cash consideration of $3.50 per share, and (ii) assuming or refinancing all of the Company's debt. The Merger Agreement and the Acquisition have been unanimously approved and recommended to shareholders for adoption by the Company's Board of Directors. Description of Business PureTec is a vertically integrated manufacturer of specialty plastic products. Many of these products are leaders in their niche markets. PureTec is a leading producer of garden hose, disposable medical tubing, and precision tubing and gaskets. The Company also produces plastic materials that are used in various specialized applications. For example, PureTec's Colorite Polymers group is the worldwide leader in medical-grade vinyl compounds. The Company is also a leader in plastic recycling, producing high-grade recycled polyethylene terephthalate ("PET") for packaging and fiber applications. The Company's operations consist of two manufacturing categories, "Plastic Products," with approximately 60% of total sales; and "Plastic Materials," with approximately 40% of total sales. The Company's major product lines are listed below, with the manufacturing division names in parenthesis:
Plastic Products Plastic Materials - ---------------- ----------------- Garden Hose (Colorite Plastics) Medical-grade Vinyl Compounds (Colorite Polymers) Medical Tubing (Plastron) Specialty Vinyl Polymers (Colorite Polymers; Cybertech Polymers) Specialty Tubing & Gaskets Recycled Plastics (Pure Tech Plastics) (Action Technology; American Gasket & Rubber)
Each of these product lines has its own unique customer base, competitive environment, cost and pricing structures, business cycles, and related business strategies, as described in the following paragraphs. 2 Garden Hose PureTec believes that its Colorite Plastics division is the leading producer of garden hose in the United States, with more than 40% of the market. There are two other principal competitors in the United States, and several smaller companies having substantially smaller market shares. Founded in 1949 in Garfield, New Jersey, Colorite Plastics now manufactures in six modern facilities throughout the United States and Canada. Garden hose products are sold primarily to home centers, hardware cooperatives, food, automotive, drug and mass merchandising chains and catalog companies throughout the United States and Canada. Approximately 88% of sales are to Colorite Plastics' ten largest customers. The remaining sales are divided among approximately 350 smaller customer accounts. Colorite Plastics' ten largest customers include some of the fastest growing and most widely respected retail chains in North America. Colorite Plastics' market strategy is to provide a complete line of innovative, high-quality products along with superior customer service. Innovations have included the patented Colorite(R) Evenflow(R) design and the "drinking water safe" product lines. Products are sold directly through Colorite Plastics' salespeople and also through approximately 20 independent representatives. The division sells both private label and brand-name products to the retail market. Advertising is limited to trade journals and advertising allowances to retailers. Colorite Plastics manufactures vinyl garden hose by the plastic extrusion process. The primary raw materials are vinyl compounds and brass couplings that are produced by the Company, and nylon reinforcement fiber that is purchased from suppliers. The Colorite Plastics division typically sets prices for its garden hose products in advance of each season and, to the extent that raw material costs increase more than anticipated, the additional costs cannot be passed on during that season. The garden hose business is highly seasonal with approximately 75% of sales occurring in the second half of the Company's fiscal year. As a result of the need to build up inventories in anticipation of such second-half sales, the Company's working capital requirements have historically peaked in the second and third quarters of the Company's fiscal year. In addition, this seasonality has a significant impact on the Company's net income from quarter to quarter. Colorite Plastics historically operates the first two quarters of the fiscal year at a loss. In addition to its core garden hose business, Colorite Plastics has launched new products, such as a new line of irrigation products for the do-it-yourself markets. For example, in recent years the division has introduced an irrigator "soaker hose," composed of 65% recycled rubber, and the Auto-Moist(TM) line of drip irrigation and watering products. Colorite Plastics also manufactures specialty hose products such as air hose. Colorite Plastics, like other PureTec divisions, is also expanding to international markets. In 1996, it began serving the Canadian market with a new facility in Mississauga, Ontario. Medical Tubing The Company's Plastron division has been a leader in disposable medical tubing for more than 40 years. Plastron's worldwide operation includes strategically located plants in California, Georgia, and several production lines at Action Technology Belgium that support sales to the medical industry. These facilities include "clean room" extrusion operations. Plastron specializes in high-quality, close tolerance tubing for various surgical procedures and related medical applications. These applications include intravenous ("IV") therapy, hemodialysis therapy, cardiovascular procedures such as coronary bypass surgery, suction and aspiration products, and urinary drainage and catheter products. Action Technology Belgium had sales from its medical tubing operation of approximately $2,100,000 and $1,834,000 for fiscal years 1997 and 1996, respectively. The Company believes that its Plastron division is a leading producer of medical tubing, with approximately 25% of the worldwide, non-captive market. There are four other principal competitors serving the medical tubing market. 3 Medical tubing is sold primarily to a small number of manufacturers of medical devices. Approximately 50% of sales are to Plastron's five largest customers. Products are sold directly through Plastron's salespeople. Advertising is limited to trade journals and trade shows. Plastron manufactures medical tubing by the plastic extrusion process. The primary raw materials are proprietary vinyl compounds, which are produced by Plastron, and certain other plastic materials, which are purchased from a select number of suppliers. Raw material price increases generally can be passed on to customers after a delay of two or three months, although competitive pressures sometimes prevent price increases. Medical tubing is one of the Company's fastest growing product lines. Continued growth is expected to come from general market expansion and expansion in international markets, as well as the addition of new customers and new products. New products include microbore tubing, silicone substitute formulations, and trilayer tubing substitutes. For example, Plastron has developed microbore tubing with extremely small internal diameters. This microbore tubing can be used to regulate the delivery of critical intravenous fluids without the need for more expensive drip control devices. Medical professionals can precisely control the drug delivery speed simply by selecting the proper diameter tube, thereby improving accuracy and reducing cost. Specialty Tubing & Gaskets PureTec's specialty tubing and gasket product line consists of (i) extruded plastic tubing, sold primarily to manufacturers of aerosol valves, dispenser pumps, and writing instruments; (ii) rubber and thermoplastic gaskets for the aerosol and dispenser pump markets; and (iii) consumer products, chiefly consisting of swimming pool and other corrugated hose. These products are manufactured primarily by the Company's Action Technology ("Action") division, which includes the American Gasket and Rubber Company ("AGR"), Plastron, and Action - Europe. Most of Action's products are manufactured by the plastic extrusion process and are sold throughout the United States, Europe, and selected worldwide markets. Action is the largest tubing extruder in North America. Writing instrument products include pen barrels and ink tubing as well as ink reservoirs for felt-tip pens. Action's sales to the dispenser industry are comprised of dip tubes which transmit the contents of a dispenser can to the nozzle, and plastic and rubber gaskets and seals used in the manufacture of dispenser valves and pumps. These products are manufactured to very precise tolerances, according to the specifications developed by Action and its customers for specific applications. Other OEM (Original Equipment Manufacturer) sales include corrugated hose to manufacturers of floor care products, and various types of hoses and tubing for other industrial applications. Action also manufactures consumer products which are primarily sold to retail merchandisers, including swimming pool and spa hose. Action's principal competitive pressure is the possibility of internal production by its customers. The Company believes Action's products compete successfully based on product quality, prompt delivery, technical service and price. Action believes that its ability to produce high volumes of products to exact specifications has been a key to its success in the marketplace and the longevity of its customer relationships. Each Action facility is strategically located to supply multi-national customers on a timely basis. In the United States, Action maintains plants in New Jersey and Illinois. AGR's facilities are in Illinois, and Action's Plastron subsidiary operates in California and Georgia. Action's European plants, in Belgium and Italy, serve the European, Asian, and African markets with products similar to those manufactured in the United States. Sales from its plants in Belgium and Italy were approximately $13,458,000 and $12,450,000 for 1997 and 1996, respectively. Action's OEM sales are conducted by technically trained full-time employees who coordinate marketing activities directly with the managers of each plant. Action also uses independent representatives to sell its pool hose products. In addition, Action manufactures and markets pool hose nationwide under a joint agreement with Haviland Consumer Products. This agreement utilizes the technology and marketing strengths of both companies in their effort to build a leadership position in the market for pool hose. The raw materials for all of Action's products (primarily polyethylene and polypropylene) are purchased from a number of different suppliers. Some PVC compounds are purchased by Action from other PureTec divisions. The 4 Action division has generally been able to pass through increases in raw material costs to its customers pursuant to multi-year contracts and other agreements. Medical-grade Vinyl Compounds The Company believes that its Colorite Polymers division is the world's largest producer of high-quality vinyl compounds for use in the medical industry. Medical-grade compounds are sold primarily under the "Unichem Products" brand. These compounds are sold to leading manufacturers of medical devices and equipment. They are also sold to producers of tubing and closures for the food and beverage industry and used in a variety of food contact applications. The market for medical-grade vinyl compounds is highly specialized, with two significant competitors. For more than 30 years, Colorite Polymers has been supplying these specialized vinyl compounds for FDA-regulated applications. The Company believes it competes effectively based on product quality and performance and prompt delivery, and that price is a secondary consideration for its customers. Colorite Polymers' chemists work closely with customers to develop compounds that address their specific requirements. Through this custom work, the Company has introduced a number of breakthroughs to the medical device industry by developing formulations with unique physical characteristics. For example, Colorite Polymers has recently developed a new family of flexible vinyl compounds designed to replace silicone rubber in a variety of medical and commercial applications. Medical-grade compounds are produced in the Company's facilities in Ridgefield, New Jersey; Sparks, Nevada; and Belfast, Northern Ireland. The Company sells these compounds in worldwide markets. Approximately 25% of external sales are to Colorite Polymers' five largest customers. Products are sold directly through the Company's salespeople. Advertising is limited to trade journals and trade shows. Colorite Polymers purchases raw materials for its compounding operation (vinyl resins, plasticizers and stabilizers) from several sources. The Company in the past has generally been able to pass on raw materials price increases for Unichem Products on a relatively timely basis. Specialty Vinyl Polymers The Company's specialty vinyl polymers business consists of two divisions of the Colorite Polymers group: Burlington Resins, Inc., doing business as Colorite Specialty Vinyl Resins ("SVR"); and Cybertech Polymers. SVR operates a plant in Burlington, New Jersey, with an annual production capacity of 120 million pounds of vinyl resins. The plant was purchased from Occidental Chemical Corporation in August 1995. The plant employs specialized technology to produce dispersion, blending, and copolymer suspension resins for a variety of industries, including floor covering, automotive sealants and adhesives, coil coatings, plastisol compounding and PVC packaging. Management believes that SVR has built a relatively unique position in the specialty resins market by offering customized products for niche markets that the larger commodity producers do not serve. SVR's business strategy is built on individual customer service and the highest standards of quality. Although SVR's market share in the overall specialty resins market is about 7%, SVR's share in its target markets exceeds 20%. Approximately 50% of sales are to the division's 10 largest customers. SVR is actively developing new products to serve specific customer applications. The division has also added to its product line by initiating a technology exchange with Vinnolit Kunstsoff of Ismaning, Germany. The exchange agreement enhances the Company's breadth of product line by offering specialty resin formulations not previously available in North America. SVR purchases raw materials from several large chemical companies. The division in the past has generally been able to pass on raw materials price increases for its specialty formulations, but to a lesser extent for its more commodity-type products. The division has also experienced competitive pressure from large chemical companies who offer a greater breadth of products. 5 The Cybertech Polymers division produces a variety of specialized and general purpose vinyl compounds. Approximately 70% of Cybertech Polymers' outside sales are to manufacturers of wire and cable, with the remaining outside sales going to the footwear, general purpose extrusion and molding markets. Cybertech Polymers' compounds are sold throughout the United States by an internal sales force and eight independent representatives. Approximately 50% of Cybertech Polymers' overall production is used internally by PureTec's Colorite Plastics division in the manufacture of garden hose. The markets for Cybertech Polymers' vinyl compounds are highly fragmented, and neither the Company nor any competitor has a controlling share. The Company believes it competes effectively based on product quality, performance and prompt delivery, and price. Cybertech Polymers purchases raw materials from several sources and also manufactures them internally. This division also recycles scrap vinyl. Cybertech Polymers in the past generally has been able to pass on raw materials price increases to customers on a relatively timely basis. Recycled Plastics PureTec believes that its Pure Tech Plastics division is the leading supplier of high-quality recycled PET for reuse in bottle-grade and sheet applications. The division has developed proprietary processes for cleaning, sorting, and recycling post-consumer plastic bottles into clean PET flakes or pellets. This technology has been optimized to produce extremely high quality recycled PET, suitable for reuse in new bottles. The technology continues to be refined by Company engineers, and has been licensed to other companies in a number of countries, including Taiwan, South Korea, Canada, and Japan. Raw materials used by the Pure Tech Plastics division consist mostly of post-consumer soft drink bottles. This raw material is purchased from various suppliers who obtain bottles in states with "deposit laws," or who conduct curb-side pickup operations. Pure Tech Plastics competes with other recycling facilities both to obtain materials for recycling and to sell recycled materials to manufacturers. Competition for supplies of recyclable material is based upon price and promptness of service in collecting or accepting material. Competition for sales of recycled material is based on price and consistency of quality. Prices for recycled PET have been volatile in recent years, causing wide swings in the division's revenues and earnings. To reduce the impact of this volatility, the Company has restructured its recycling operations and linked supply contracts to the market price of recycled PET. This has resulted in a more consistent spread between the cost of bottles and the price of recycled PET, providing the Company with an opportunity to increase earnings by reducing processing costs. This strategy is being followed with the planned opening of a new state-of-the-art recycling facility in Huntington, West Virginia in early 1998. The Huntington plant is expected to reduce processing costs per pound. Company Organization The Company continues to assess and simplify its organizational structure. In the current year, this has included the elimination of certain non-performing entities, reducing the equity in non-core businesses, and increasing the ownership of Plastic Specialties and Technology, Inc. ("PST"), the Company's primary operating subsidiary. Although these actions have had a short-term impact during the 1997 fiscal year, management believes that they will be accretive to earnings in 1998 and beyond. As of September 30, 1997, PureTec Corporation owned approximately 96.1% of the outstanding common stock of PST, and 100% of Burlington Resins, Inc. The following chart shows PureTec's principal divisions and subsidiaries and their primary business function: 6 ----------------------- | PureTec Corporation | ----------------------- | -------------------- | Ozite Corporation | | (inactive) | --------------------- | --------------------------------------------------- | | ------------------------ | | Plastic Specialties | | | & Technologies, Inc. | | ------------------------ | | | |--- Action Technology (Specialty Tubing) | | | | -------------------------------- | |--------| Action Technology Belgium NV | | | | (Medical & Specialty Tubing) | | | -------------------------------- | | | | -------------------------------- | |--------| Action Technology Italia SpA | | | | (Specialty Tubing & Gaskets) | | | -------------------------------- | | | | --- American Gasket & Rubber (Dispenser Gaskets) | | | | --- Plastron (Medical Tubing) | | | |--- Colorite Plastics (Lawn & Garden Products) | | | |--- Colorite Polymers (Vinyl Polymers) | | | | --- Unichem Products (Medical-grade Plastics) | | | | -------------------------------- | |--------| Colorite Europe, LTD | | | | (Medical-grade Compounds) | | | -------------------------------- | | | | --- Cybertech Polymers (Vinyl Compounds) | | | | -------------------------------- | | | Burlington Resins |---------------- | | (Specialty Vinyl Resins) | | -------------------------------- | |--- Pure Tech Plastics (Recycled PET) Patents and Trademarks The Company seeks to protect its proprietary know-how through the application of patent and trademark laws. However, in the opinion of management, none of its patents or trademarks are material to its operations. Research and Development The Company employs certain professionals who, along with other responsibilities, are engaged in research relating to the development of new products and to the improvement of existing products. The Company works closely with certain clients to develop and improve certain products and product lines. Much of this product development is funded by clients and therefore is not reflected in the Company's financial results. For the years ended July 31, 1997, 1996, and 1995, the Company recorded $654,000, $689,000 and $1,268,000 for research and development activities. Employees As of July 31, 1997, the Company employed approximately 1,900 full-time employees, of which approximately 1,650 were employed in the United States and the balance in Europe and Canada. Certain employees at facilities in Ridgefield and Rockaway, New Jersey are represented by the International Brotherhood of Teamsters, under contracts that expire August 1, 2000. Certain employees at the Burlington, New Jersey facility are represented by the Oil Chemical 7 & Atomic Workers International Union, AFL-CIO, under contracts that expire July 1, 2001. Contracts with both of the above unions were successfully renegotiated in 1997. Certain employees in East Farmingdale, New York are represented by the Waste Material Sorters, Trimmers & Handlers Union, under a contract that expires on April 30, 1998. Approximately 45% of all employees are members of unions including a majority of the European and Canadian employees. The Company believes that employee relations at all of its manufacturing facilities are good, and it has not experienced any work stoppage since its formation. Environmental Matters As described in Item 3. Legal Proceedings, the Company is party to environmental proceedings in the ordinary course of business, none of which management believes are likely to have a material adverse effect on its consolidated financial position or results of operations. Additionally, in management's opinion none of these proceedings nor compliance with Federal, state and local environmental laws and regulations are believed to require any material estimated capital expenditures for environmental control facilities in the foreseeable future. Item 2. PROPERTIES The Company believes that its facilities are suitable and have sufficient productive capacity for its current and foreseeable operational and administrative needs. Set forth below is a list and brief description of all of the Company's offices and facilities, all of which are owned unless otherwise indicated.
Approximate Location Function Square Feet - -------- -------- ------------- Ridgefield, New Jersey (1) Corporate Headquarters 9,900 Tonawanda, New York (1) Manufactures brass couplings 31,000 Piscataway, New Jersey (3) Manufactures general purpose vinyl 150,000 compounds Ridgefield, New Jersey Manufactures garden hose and 328,000 medical-grade vinyl compounds Ridgefield, New Jersey (3) Warehouse 70,000 Sparks, Nevada (3) Manufactures garden hose and 250,000 medical grade vinyl compounds Waco, Texas Manufactures garden hose 104,600 McKenzie, Tennessee (2) Manufactures porous pipe 20,000 Mississauga, Ontario (4) Manufactures garden hose 150,000 City of Industry, Manufactures medical tubing 110,000 California (5) and other specialty tubing Clinton, Illinois Manufactures dip tubes, 62,500 writing instrument products and corrugated hose Dalton, Georgia Manufactures medical tubing 40,000 and other specialty tubing Erembodegem Manufactures medical tubing 88,200 8 (Aalst), Belgium and other specialty tubing Milan (Gaggiano), Italy (6) Manufactures rubber compounds 15,000 Milan (Gaggiano), Italy Manufactures dispenser gaskets 25,800 and rubber injection-molded parts Milan (Gaggiano), Italy (3) Manufactures specialty tubing 24,000 and related products Rockaway, New Jersey Manufactures specialty tubing and 98,600 related products Schiller Park, Illinois Manufactures rubber compounds 20,000 Schaumburg, Illinois (7) Manufactures dispenser gasket 58,000 Flint, Michigan (10) PET recycling plant (grinding only) 42,500 Howell, Michigan PET recycling plant (grinding only) 18,400 Livonia, Michigan (5) PET recycling plant 60,000 East Farmingdale, New York (1) PET recycling plant 49,000 Auburn, Maine (5) Plastics and aluminum baling operation 22,000 Lawrence Twp., New Jersey (8) PET recycling plant (inactive) 80,000 Hillside, New Jersey (9) Glass recycling plant (discontinued) 15,000 Newark, New Jersey Glass recycling plant & MRF (discontinued) 101,000 High Point, North Carolina (12) Plastic injection molding plant 100,000 Burlington, New Jersey Manufactures specialty PVC resin 107,000 Belfast, Ireland (11) Manufactures specialty compound 45,000 Huntington, West Virginia PET recycling plant Under construction
- -------------------------------- (Years relate to calendar years) (1) Lease expires in 2001. (2) Leased on a month-to-month basis. (3) Lease expires in 2002. (4) Lease expires in 2005. (5) Lease expires in 1999. (6) Lease expires in 2000, with an option to renew for another six year period. (7) Lease expires in 2020. (8) Facility not active (9) Lease expires in 2000. (10) Lease expires in 1998. (11) Lease expires 2017. (12) Facility sold in August 1997 in connection with sale of Styrex Industries, Inc. 9 Item 3. LEGAL PROCEEDINGS The Company is party to certain litigation and environmental proceedings in the ordinary course of business, none of which the Company believes are likely to have a material adverse effect on its consolidated financial position or results of operations. In June 1997, the Company filed suit against Occidental Chemical Corporation ("OxyChem"), alleging that certain postretirement benefit liabilities were substantially understated when Burlington acquired the acquisition from OxyChem.(see Note 1). In August 1997, the Company and OxyChem agreed to settle this litigation. Pursuant to the terms of the settlement agreement, the Company has agreed to release OxyChem from any claim related to this liability in exchange for OxyChem's agreement to settle a $4 million subordinated term loan including accrued interest ("seller financing") for $3 million. A portion of the settlement has been accounted for as an adjustment to the purchase price, with the offset recorded against goodwill, with the remainder adjusting accrued interest based upon the seller financing. Ozite is engaged in litigation in which it seeks damages from the former owner of Dalen, a discontinued segment of Ozite. In December 1987, Ozite commenced legal proceedings against the seller of Dalen, seeking monetary damages and other equitable relief from the seller for various misrepresentations made in its financial statements and other miscellaneous information, based on which Ozite elected to proceed with the purchase of Dalen. The seller counterclaimed for the recovery of the balance of the purchase price in an amount approximately equal to $3,000 plus accrued interest, amounts claimed to be due under a consulting agreement, and punitive damages. Subsequent to July 31, 1997, the Dalen litigation has been settled. The impact of the settlement of the Dalen litigation has been reflected in the Company's net loss from discontinued operations as of July 31, 1997, as Ozite had previously reported the Dalen business which it had acquired as a discontinued operation in 1988. The settlement agreement with Dalen provided for Ozite to make two (2) payments of $500,000 each by October 15, 1997 and a payment for $2,250,000 by January 31, 1998. Interest accrues on the final payment of $2,250,000 from October 15, 1997 until it is paid at the rate of 8% per annum. The Company has made the required payments of $1,000,000 which were due on October 15, 1997. The court in Cook County, Illinois retains jurisdiction for enforcement of the settlement agreement in the event Ozite is unable to make any of these scheduled payments. Management believes that it has a number of alternatives available to finance the final settlement payment to Dalen, and therefore it expects to be able to meet the final payment obligation by January 31, 1998 (See note 20(b)). PTI Plastics ("PTIP"), certain of its directors, three former directors and its President were defendants in a lawsuit brought in 1989 in New Jersey Superior Court and are currently defendants in a lawsuit brought in 1989 in New Jersey Superior Court by Frank Tammera, Sr., a stockholder and former officer and director of PTIP and Frank Tammera Jr., a former officer of PTIP. Trial of the Frank Tammera, Sr. lawsuit commenced in April 1991 and concluded in 1995. In March 1996, the New Jersey Superior Court decided that PTIP did not have to reinstate Mr. Tammera, Sr., that his termination had been for cause, and in March 1996 a NJ Superior Court decided for PTIP on all matters except that PTIP was obligated to pay him only approximately $30,000 of indebtedness, which PTIP had acknowledged, and $14,000 in royalties. Final judgement in the Frank Tammera, Sr. suit was entered on June 6, 1996. In August 1996, Mr. Tammera, Sr. appealed the court's decision. The Frank Tammera, Jr. lawsuit, and two similar lawsuits from Michael and Albert Tammera, have been stayed pending the resolution of the Frank Tammera, Sr. lawsuit. In May 1992, PST and all of its directors as of 1988, as well as K and B Liquidating Corp. (a former subsidiary of PST which is being liquidated) were named in two lawsuits filed in the Minnesota state courts. The plaintiffs are Douglass Hutchinson (since deceased) and James Czaja, both of whom were former employees of a former subsidiary of PST, Circuit Chemistry Manufacturing Corp. ("Circuit Chemistry"). The suits alleged several causes of action, all of which center upon a claim that PST and/or other defendants did not adequately disclose sufficient information to the plaintiffs in connection with the acquisition from the plaintiffs by PST of their 20% equity interest in Circuit Chemistry, and the termination of their employment agreements. Subsequent to July 31, 1997, the cases brought by Czaja and Hutchinson have been settled by PST. Previously, management had expected these cases to be litigated, and management had expected that PST would win these cases. However, in light of the growing costs of litigation, and the remaining uncertainty of the outcome of a trial, management elected to settle these cases. The impact of the settlement of these cases is reflected in the Company's net loss from discontinued operations for the year ended July 31, 1997, as PST had 10 previously reported Circuit Chemistry as discontinued operations as of 1989. Total settlement payments to the plaintiffs in connection with this settlement is $1,725,000. Under the 1984 Agreement of Purchase and Sale between Dart & Kraft and PST (the "1984 Agreement"), Dart & Kraft retained responsibility for liabilities resulting from any violation of applicable environmental law or laws and regulations of the Occupational Safety and Health Administration ("OSHA") prior to the date of the 1984 Agreement. Dart & Kraft further agreed to indemnify PST, as of the effective date of the 1984 Agreement, for existing, pending, threatened, or unasserted action suits, or other claims or proceedings (whether contingent or otherwise), with respect to certain matters (including environmental matters). Pursuant to the split-up of Dart & Kraft in 1987, Kraft, Inc. retained all liability under the 1984 Agreement (accordingly, references to Dart & Kraft herein include only Kraft after the effective date of the split-up). Under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and state laws similar to CERCLA, PST may be subject to liability for cleanup costs and other damages resulting from past off-site disposal of hazardous substances by PST or its corporate predecessors, or for the contamination of property currently owned by PST with respect to such materials. PST is unaware of any on-site or off-site hazardous substance contamination for which it is reasonably likely to be liable. There are also several matters governed by CERCLA resulting from the activities of a former PST division, Synthetic Products Co. (sold to Cookson America, Inc. ("Cookson") in August 1988) and a PST subsidiary, Ware Chemical Co. ("Ware Chemical"), that is no longer in operation and whose assets were also sold to Cookson in 1988. On February 18, 1993, Ware Chemical Co. ("Ware Chemical"), a former PST subsidiary (now dormant) was served with a third party complaint in the matter of United States v. Davis ("Davis"). In Davis, the United States has alleged that certain private entities are liable, pursuant to the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), for cleanup costs that have been incurred, and will be in the future, with remediation of the Davis Landfill site in Rhode Island. Ware Chemical was owned by Dart Industries (now Kraft, Inc.) During the time in question (1975-1977), and Kraft has agreed to assume all responsibility. PST was also notified by Kraft in October 1989 of the existence of a claim by the New Jersey Department of Environmental Protection and Energy ("NJDEPE") with respect to the Chemical Control site in Elizabeth, New Jersey, but PST has not received any further information regarding this claim. Information produced in the Davis matter indicated that Ware Chemical used a hazardous waste transporter that sent hazardous wastes to the Chemical Control site. PST has no basis at this time to determine whether it will be subject to liability with respect to the Chemical Control site or the amount of said liability. As noted above, Ware Chemical is a dormant company with no assets. In addition to the above, PST is also subject to certain obligations pursuant to the New Jersey Environmental Cleanup Responsibility Act ("ECRA") (which has been amended and renamed the "Industrial Site Recovery Act"). Under ECRA, the "transferor" of an industrial establishment was required to certify that no hazardous substances had been discharged or released at the industrial establishment before a transfer could take place; otherwise, the transferor is required to prepare a cleanup plan or enter into a consent agreement with the NJDEPE to investigate and remediate releases of hazardous substances pursuant to NJDEPE-approved procedures. Dart & Kraft assumed responsibility for compliance with ECRA in connection with the 1984 sale of its plastic sector to PST, and has completed all of its obligations, except for the cleanup of Colorite's Ridgefield, New Jersey facility and possible clean up of the Ware sites described above. Kraft has an approved cleanup plan for the Colorite facility and final papers for a negative declaration clearing the site from environmental liability have been received. The Company's operations are subject to requirements imposed under certain federal, state and local environmental and health and safety laws and regulations, including the federal Clean Water Act, Clean Air Act, Resource Conservation and Recovery Act ("RCRA"), CERCLA and OSHA and comparable state laws, relating to waste water discharges, air emissions, solid waste management and disposal practices, work place safety and real property use and ownership. The Company believes that it is in substantial compliance with such laws and regulations. No assurances can be given, however, that the Company will continue to be able to secure, renew, and maintain compliance with the terms and conditions of the required environmental permits and approvals, that other environmental permits or approvals may not be required for the Company's operations or that penalties will not be imposed by regulatory entities for any failures to have secured all required environmental permits or approvals. Further, there can be no assurances that more 11 stringent statutory or regulatory environmental or work place safety requirements will not be enacted or adopted in the future which could have a material adverse effect on or materially restrict the Company's operations or business. There can be no assurance as to the ultimate outcome of these litigations or their possible impact on the Company. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On February 26, 1997, the Company held its annual meeting of stockholders at which the following items were submitted to a vote of shareholders. As of the record voting date of January 3, 1997, there were 29,339,171 shares of Common Stock entitled to vote. Votes For Votes Against --------- ------------- 1. To elect nine directors for a term of one year or until their successors are elected and qualified: Fred W. Broling 22,449,108 342,341 David C. Katz 22,172,750 618,699 Murray Fox 22,174,846 616,603 Leo Gans 22,265,525 525,924 Robert L. Guyett 22,440,238 208,541 Werner Haase 22,224,708 356,432 Edward P. Hamway 22,429,338 356,541 John J. Harvey 22,266,123 367,245 Peter R. Harvey 22,255,723 208,541 2. To ratify the selection and appointment by the Company's Board of Directors of Deloitte & Touche LLP independent certified public accountants, as auditors for the Company for the fiscal year ended July 31, 1997. 22,620,910 93,787 12 PART II Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The following chart shows the quarterly high and low bid prices for the Company's Common Stock available for the last two fiscal years. These quotations have been reported by the National Association of Securities Dealers, Inc. The prices represent quotations by the dealers without adjustments for retail mark-ups, mark-downs or commissions and may not represent actual transactions.
Calendar Quarter High Low - ---------------- ---- --- Third 1995 5 3/4 2 7/8 Fourth 1995 3 1/4 1 15/16 First 1996 2 7/8 2 Second 1996 4 1/4 2 3/32 Third 1996 3 9/16 2 1/4 Fourth 1996 2 7/16 1 5/8 First 1997 2 5/16 1 23/32 Second 1997 2 1/8 1 9/32 Third 1997 2 17/32 1 7/32
The Company has approximately 1,000 record holders of its Common Stock and believes that the approximate total number of beneficial holders of the Common Stock of the Company to be in excess of 11,000, based on information received from the transfer agent and those brokerage firms who hold the Company's securities in custodial or "street" name. Dividends The Company has not paid any cash dividends in the last three fiscal years and does not anticipate paying any cash dividends in the foreseeable future. Item 6. SELECTED FINANCIAL DATA The summary of selected financial data for the five years in the period ended July 31, 1997 should be read in conjunction with the financial statements presented elsewhere herein. See Notes 1 and 2 for a discussion of the basis of presentation, principles of consolidation and defined terms. 13 Statement of Operations Data: (000's omitted except per share amounts)
Year Year Year Year Year Ended Ended Ended Ended Ended July 31, July 31, July 31, June 30, June 30, 1997 (2) 1996 (2) 1995 (1) 1994 1993 -------- -------- -------- -------- -------- Net Sales $315,334 $326,344 $ 30,189 $ 48,590 $16,793 Income (loss) from continuing operations $ 1,345 $ (4,407) $ (7,519) $(14,841) $ 2,183 Income (loss) from continuing operations per share of common stock, Primary $ 0.05 $ (0.18) $ (0.42) $ (1.68) $ 0.36 Income (loss) from continuing operations per share of common stock, Fully diluted $ 0.05 $ (0.18) $ (0.42) $ (1.68) $ 0.25 Weighted average shares of common stock outstanding, Primary 29,429 27,268 17,751 8,857 6,116 Weighted average shares of common 29,429 27,268 17,751 8,857 8,763 stock outstanding, Fully diluted Balance Sheet Data: (000's omitted) July 31, July 31, July 31, June 30, June 30, 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- Working capital $ 20,037 $ 21,744 $ 14,461 $ 3,725 $18,116 Total Assets 311,823 296,690 290,121 56,442 60,382 Long-term obligations 142,669 142,672 126,751 7,581 9,617 Stockholders' equity 67,177 70,708 73,519 34,290 42,399 Cash dividends per --- --- --- --- --- share of stock
(1) See Notes 9, 10 and 18 to the Consolidated Financial Statements with respect to acquisitions, plant closings and discontinued operations. (2) See Notes 1, 2, 9, 10 and 18 to the Consolidated Financial Statements with respect to the acquisition of Ozite, other acquisitions, write-offs of intangible assets, plant closings, and discontinued operations. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (Dollars in thousands, except for per share data). Since the consummation of the transaction between PTI Plastics, Inc. ("PTIP") and Ozite Corporation ("Ozite") in which both became wholly-owned subsidiaries of PureTec Corporation (the "Company" ), the Company's financial 14 statements show historical information only for PTIP for periods prior to August 1995. Consequently, references to the Company with respect to such historical financial information refer solely to PTIP, unless otherwise stated. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and notes thereto. Results of Operations Fiscal 1997 Compared to Fiscal 1996 Net sales for the year ended July 31, 1997 ("fiscal 1997") were $315,334, a decrease of $11,010 or 3.4% compared to the year ended July 31, 1996 ("fiscal 1996"). Domestic plastic product sales were $149,083, a decrease of $3,269 or 2.1% compared to 1996. The decrease represents volume shortfalls for garden hose partially offset by increased volume of gaskets and medical and dip tubing. Foreign plastic product sales of $35,300 increased $1,142 or 3.3%. The increase represents volume growth in both medical tubing and rubber and plastic gaskets. Plastic material products had sales of $154,064, an increase of $11,750 or 8.3%. This increase represents volume growth in medical-grade compound and specialty vinyl polymers as well as increased volume used internally by the plastic products segment. Recycling sales were $18,681 which represents a decrease of $15,567 or 45%. This decrease is a result of price decreases for recycled PET, which in recent years has been very volatile. Gross profit for fiscal 1997 was $66,915, an increase of $1,462 (2.2%) compared to $65,453 for fiscal 1996. Domestic plastic products had gross profit of $38,061 for fiscal 1997 which is a decrease of $846 or 2.2% compared to 1996. This decrease is a result of volume shortfall for garden hose partially offset by increased volume of gaskets and medical and dip tubing. Foreign plastic products had gross margins of $11,501, an increase of $1,254 or 12.2% as compared to 1996. This is a result of increased volume and reduced operating costs. Plastic material products had a gross margin of $16,942 which represents an increase of $1,168 or 7.4% as compared to 1996. This increase represents volume growth in medical-grade compounds and specialty vinyl polymers. This was partially offset by start-up costs associated with Colorite Europe Limited. Recycling gross margins of $1,528 represents a decrease of $414 or 21% compared to 1996. This is a direct result of price decreases for recycled PET. Selling, general and administrative expenses for fiscal 1997 were $36,091, a $536 (1.5%) increase compared to fiscal 1996. As a percentage of net sales, these expenses increased to 11.5% in fiscal 1997 from 10.9% in fiscal 1996. This increase is largely due to the start-up of Colorite Europe Limited in Ireland and an increase in professional fees on a corporate basis which was partially offset by reduced selling commissions for garden hose. Operating income for fiscal 1997 and 1996 was $26,617 (8.4% of net sales) and $20,868 (6.4% of net sales), respectively, an increase of $5,749 or 28%. Domestic plastic product's operating income of $21,822 for fiscal 1997 represents an increase of $2,456 or 12% compared to 1996. This increase is a direct result of increased volume of gaskets and medical and dip tubing partially offset by reduced volume for garden hose. Foreign plastic product's operating income of $8,276 for fiscal 1997 is an increase of $1,901 or 31% as compared to fiscal 1996. This increase is a result of improved volume in both medical tubing and rubber and plastic gaskets. The plastic material products segment had operating income of $6,533 for fiscal 1997, an increase of $626 or 11% compared to 1996. The increase is a result of volume growth in medical-grade compounds and specialty vinyl polymers partially offset by start-up costs at Colorite Europe Limited. Recycling had an operating loss of $197 which represents an improvement of $255 (after the exclusion of $4,636 write-off of goodwill and obsolete facilities). The improvement is due to the decrease in costs and the stability of PET prices during the second half of 1997. An overall comparison between 1997 and 1996 shows an aggregate write-off of goodwill and obsolete assets of $4,636 in 1996. The majority of this write-off represents a reserve for shutdown costs at the Company's Springfield recycling facility. Interest expense for fiscal 1997 and 1996 was $18,108 and $18,702, respectively, which represents a $594 (3.2%) decrease. This decrease is primarily due to the interest related to the settlement of the OxyChem loan, the payoff of certain Old Recycling loans during the current fiscal year and improved borrowing rates from our primary lender. 15 The tax provision for 1997 includes a current foreign tax provision of $2,804, a current state tax provision of $150 and a deferred foreign tax provision of $177. The tax provision for fiscal 1996 includes a current foreign tax provision of $2,269, a current state tax provision of $288 and a deferred foreign tax provision of $80. The Company generated net income from continuing operations of $1,345 for fiscal 1997 compared to a loss of $4,407 in fiscal 1996. The increase is partly attributed to write-offs of obsolete assets related to recycling operations in 1996 of $4,636 as well as improvements within the plastic products segment. During 1997, the Company recognized losses on the discontinuance of its injection molding operation of $3,476 (which includes a $2,250 loss related to the disposal of the operation), an additional $672 loss on the disposal of its Ozite Manufacturing operations, an additional $1,988 loss related to Circuit Chemistry and a $2,000 gain from the Dalen lawsuit. During 1996, the Company recorded a loss related to Ozite of $3,220 (which includes a $2,241 loss for disposal of the operation) as well as a $546 loss from its injection molding operation. See Note 17 for a further description related to the Company's discontinued operations. Fiscal 1996 Compared to Fiscal 1995 For the year end July 31, 1996, the Company recorded net sales of $326,344 compared to $30,189 for fiscal 1995. The large increase was attributable to the combination with Ozite and reflects the Company's greatly expanded scope of operations together with the acquisition of Burlington Resins, Inc. ("Burlington"). The Company's domestic and foreign plastic products and plastic materials segments were acquired as part of the aforementioned mergers. For the year ended July 31, 1996, net sales for the domestic and foreign plastic products segments were $152,352 and $34,158, respectively. Net sales for the plastic material segment were $142,314 for the year ended July 31, 1996, reflecting the addition of Burlington and the PVC compound operations. The plastic materials segment provides PVC compound to the domestic plastic products segment. Transfers are made at raw material cost plus a value added factor for labor and overhead. For fiscal 1996, the plastic material segment transferred approximately $32,000. Net sales for the recycling operation were $34,248 for the year ended July 31, 1996, an increase of $4,059 as compared to fiscal 1995. Gross profit for fiscal 1996 was $65,453 as compared to $4,836 for fiscal 1995. The $60,617 increase was primarily attributable the addition of Ozite & Burlington. Selling, general and administrative expenses were $35,555 and $301 for fiscal 1996 and fiscal 1995, respectively. As a percentage of net sales, these expenses were 10.9% for fiscal 1996 and 1.0% for fiscal 1995. The Company's aggregate write-offs of goodwill and obsolete assets were $4,636 for fiscal 1996. The majority of the write-off represents a reserve for shutdown costs at the Company's Springfield recycling facility. For fiscal 1995, the Company wrote-off approximately $2,803 of goodwill and other intangible assets and $4,600 of obsolete equipment. Operating income for fiscal 1996 was $20,868 (6.4% of net sales) as Interest expense was $18,702 for fiscal 1996, an $18,283 increase as compared to fiscal 1995. The increase is due to the above-mentioned transaction which includes PST which has subordinated notes of $125,000 and a $50,000 revolving credit facility, and includes Burlington which has approximately $11,000 in debt at July 31, 1996. The Company had recorded a gain of $1,000 during fiscal 1995 to reflect a gain realized on the sale of an interest in the Company's reverse vending machine subsidiary. The Company reduced its equity interest in Evolutions, Inc. during fiscal 1996 from 75% to 42% and recorded a loss from its equity investments in Evolutions and certain other equity investments. The tax provision for fiscal 1996 includes a current foreign tax provision of $2,269, a current state tax provision of $288 and a deferred foreign tax provision of $80. For fiscal 1995, no tax provision was recorded. 16 The Company had a net loss from continuing operations of $4,407 for fiscal 1996 compared to a net loss from continuing operations of $7,519 in fiscal 1995. The Company recognized a loss on the sale of its Ozite Manufacturing operations (non-woven textiles) in fiscal 1996. This loss amounted to $2,241. Losses generated from these operations amounted to $979 in fiscal 1996. In addition the Company disposed of its Styrex injection molding operation in August 1997. Losses generated from this operation were $546 and $4,580 for fiscal 1996 and 1995, respectively. Furthermore, the Company recorded a loss on the disposal of its glass operations in fiscal 1995. Liquidity and Capital Resources In the past, the Company has expanded its operations through the expansion of existing activities, acquisitions of new facilities and various business combinations. Historically, the Company's sources of liquidity and capital resources have been net cash provided by operations, bank financing, private placements of the Company's securities and other private and public financial sources. While the management of the Company believes that the Company will be able to operate on a positive cash flow basis with respect to continuing operations during the fiscal year ending July 31, 1998, the ability of the Company to continue to expand its operations may require additional funding. Cash and cash equivalents increased $750 for fiscal year 1997 compared to a $1,102 decrease for fiscal year ended July 31, 1996. The changes for these periods were attributable to the factors discussed below. The Company had working capital of approximately $20,160 at July 31, 1997 compared to working capital of approximately $21,744 at July 31, 1996. The decrease in working capital is attributable to an increase in short term borrowings of $18,495 partially offset by increases in inventory ($13,165), accounts receivable($3,061), and lower accounts payable of $1,223. Net cash (used in) operating activities was approximately $(5,444) in fiscal 1997 compared to net cash provided by operating activities of approximately $28,811 in fiscal 1996. The change was due principally to an increase in inventory of 15,864, writeoffs of goodwill, other intangible assets, and obsolete equipment. Net cash used in investing activities was approximately $11,264 in fiscal 1997 and approximately $31,469 in fiscal 1996. The change was primarily due to cash paid in the amount of $22,328 for the acquisitions of net assets in the Burlington Resins transaction in fiscal 1996. Cash flows from financing activities were approximately $18,823 for fiscal 1997, which included a $19,964 increase in short term borrowings. For fiscal 1996, net cash provided from financing activities was approximately $2,221 which included repayments of short-term borrowings of $10,840 and proceeds from long-term debt of $18,630. Net cash provided by operating activities was approximately $28,811 in fiscal 1996 compared to approximately $1,589 in fiscal 1995. The change was due principally to a reduction in the overall losses incurred by the Company, write-offs of goodwill, other intangible assets, and obsolete equipment. Net cash used in investing activities was approximately $31,469 and $14,077, respectively in fiscal 1996 and 1995. The change was primarily due to cash paid in the amount of $22,328 for the acquisitions of net assets in the Burlington Resins transaction. Cash flows from financing activities were approximately $2,221 for fiscal 1996, which represented a paydown of $7,056 of debt versus new long term borrowing of $18,027. For fiscal 1995, net cash provided from financing activities was approximately $18,766, which were provided principally by the private placement of an aggregate of 3,308,672 shares of common stock from October 1994 through July 1995 as well as the proceeds from the sale of convertible debentures in the amount of approximately $8,371. Borrowings, Debt Offerings and Redemptions On December 30, 1992, PST entered into a $50,000 Senior Loan Agreement (the "Agreement") with a commercial lending company ("CLC"). Proceeds were used to repay the borrowings outstanding under a prior loan and security agreement with a bank. The Agreement contains covenants, the most restrictive of which are maintenance of certain financial ratios, prohibition of the occurrence of additional indebtedness, the payment of dividends, certain related party transactions and limitations on capital expenditures. Borrowings under the Agreement are secured by substantially 17 all the domestic current assets of PST. Additionally, the CLC has a security interest in PST's intangible assets, and this security interest ranks pari passu with the security interest of the Senior Secured Notes (see below) in PST's intangible assets. Revolving credit advances under the Agreement are based on eligible receivables and inventory. Effective January 31, 1997, PST amended this Agreement with the CLC ("Amended Agreement"), representing the fourth amendment to the Agreement. The Amended Agreement provides, among other things, for revolving credit advances of up to $50,000 through July 31, 2000 and letters of credit of up to $1,000. The Amended Agreement provides for certain pricing performance adjustments based on defined Performance Ratios. The Company will pay interest at a defined Index Rate plus the Applicable Revolver Index Margin (ranging from 0.00% to 0.25%) or, at the election of PST, the LIBOR Rate plus the Applicable LIBOR Margin (ranging from 2.50% to 3.00%). The Amended Agreement also provides that outstanding revolving credit advances shall not exceed $20,000 for 30 consecutive days during the period from July 1 to September 30 for each year. Furthermore, the Amended Agreement provides that domestic capital expenditures are limited to $8,500, $9,000 and $9,500 in fiscal years ending 1997, 1998 and 1999 (and each fiscal year thereafter), respectively. The Company also has the right to cancel the Agreement on 30 days' written notice and pay the CLC an early termination fee of $175 if such cancellation occurs prior to January 31, 1998, and $100 if cancellation occurs on or after January 31, 1998 and prior to September 30, 1998. At July 31, 1997, the Company was not in compliance with certain of the covenants of the Amended Agreement, including the requirement to reduce borrowing to $20 million and the limitation on capital expenditures. The CLC has provided a waiver of this non-compliance as of July 31, 1997. In addition, on January 31, 1997 PST signed a Receivables Agreement with the CLC that provides PST with the ability to sell a 100% ownership interest, without recourse, in certain Eligible Receivables generated by PST. The CLC's commitment to purchase said receivables from PST are restricted to the period beginning each February 1 and ending on each May 31. The aggregate invoice face amount of purchased receivables will not exceed $12,000. PST is obligated to service the Eligible Receivables that it sells to the CLC. The CLC's commitment to purchase said receivables from PST are restricted to the period beginning each February 1 and ending on each May 31. At July 31, 1997 and 1996, short-term borrowings include revolving credit advances of $36,772 and $14,138, respectively, under the Amended Agreement and $2,087 of factored receivables. The CLC owes PST $422 related to such receivables. On November 8, 1993, PST issued $125,000 principal amount of 11-1/4% Senior Secured Notes due in 2003. The Senior Secured Notes are senior secured obligations of PST, ranking pari passu in right of payment with all existing and future senior indebtedness of PST and senior to all subordinated indebtedness of PST, if any. The Senior Secured Notes are secured by substantially all real property, machinery, equipment, general intangibles and other intellectual property now owned or hereafter acquired by PST and by a pledge of all outstanding capital stock of Plastic Specialties and Technologies Investments, Inc., a wholly-owned subsidiary of PST. The indenture for the Senior Secured Notes contains covenants which restrict, among other matters, the ability of PST and its subsidiaries to incur additional indebtedness, pay dividends, (except as defined in the indenture) redeem capital stock, prepay subordinated indebtedness, create liens, dispose of certain assets, engage in sale and merger transactions, make contributions, loans or advances and enter into transactions with affiliates. On August 16, 1995, in connection with its acquisition of the Burlington, New Jersey facility, the Company's Burlington Resins, Inc. subsidiary has entered into a revolving credit facility with a Commercial Bank for up to $5,500 based on levels of inventory and accounts receivable. Interest on this facility is the prime rate plus 1.25%. The prime rate as of July 31, 1997 was 8.5%. At July 31, 1997, there was $1,893 outstanding on this loan. The Company has also received a term loan from the Commercial Bank in the principal amount of $5,500. This term loan is payable in 28 quarterly installments of approximately $196 plus interest accrued at the prime rate plus 1.25%. At July 31, 1997 there was $3,341 outstanding on this term loan. The Commercial Bank agreement contains covenants, the most restrictive of which are the maintenance of certain financial ratios, prohibition of the incurrence of additional indebtedness, the payment of dividends, certain related party transactions and limitations on capital expenditures. The loans are secured by the property, plant and equipment, accounts receivable and inventory of Burlington Resins, Inc. As the Company intends to repay the borrowings outstanding under the Agreement during 1998, the entire amount has been classified in current portion of long-term debt at July 31, 1997. The Company also has a term loan provided by Occidental Chemical 18 Corporation. This loan is subordinated to the Commercial Bank debt. At July 31, 1997 there was $2,524 outstanding on this loan. This loan was repaid subsequent to July 31, 1997, and as such has been classified as a current liability. In February 1996, Styrex and Pure Tech Plastics, Inc. and subsidiaries ("PTP") entered into a Loan and Security Agreement with a bank ("Styrex/PTP Loan") providing an aggregate revolving credit line of $7,500 and an aggregate term loan of $5,000. The proceeds of the loan were used to pay off existing debt. As of July 31, 1996, there was $3,839 outstanding under the revolving credit line, and $2,692 under the term loan. In September 1996, the Company repaid the amount outstanding at that time relating to PTP. Styrex subsequently paid off its loans to the bank on November 11, 1996 when it signed a new Loan and Security Agreement (the "Styrex Loan Agreement") with a Finance Company for a period of three years. The Styrex Loan Agreement provides for a term loan and revolving loans up to a maximum of $6,000 and letters of credit of up to $1,000 and is secured by all of the assets of Styrex. Advances under the agreement bear interest at the rate of prime plus 1 1/2%. The initial term loan of $1,360 has scheduled repayments of $23 per month beginning December 1, 1996. As of July 31, 1997 and 1996 the revolving loan and the term loan balances were $1,086 and $1,156, respectively. The operations of Styrex were sold in August 1997. Accordingly, these amounts are included in net assets held for sale in the consolidated balance sheet which is included in other current assets. Concurrently with execution of the Merger Agreement, Tekni-Plex purchased a Convertible Note issued by PureTec in the amount of $5 million. The loan will assist PureTec and PST in meeting expected cash requirements in the period prior to completion of the Merger. The Convertible Note bears interest at 13% and is convertible at any time following the 60th day after any termination of the Agreement into a number of shares of Common Stock sufficient to retire the principal amount of the Note plus accrued interest or in any event at a base conversion rate of one share of Common Stock per $2.72 of obligations owed under the Note. The Company is required to file a registration statement with respect to the Common Stock issuable upon conversion promptly following a termination of the Merger Agreement. The Convertible Note matures on September 30, 1998. The Convertible Note is subject to prepayment by the Company in cash at any time, and contains covenants and events of default customary for a debt instrument of this type. Subsequent Events In August 1997, the operations of Styrex were sold and the operating results of Styrex for fiscal 1997 were included within discontinued operations (see Note 18). Accordingly, results for fiscal 1996 and 1995 were also reclassed to discontinued operations. In September 1997, Burlington Resins, Inc. settled a lawsuit it had filed against OxyChem. The result of this settlement was to reduce goodwill at Burlington by $1,476. (See Note 1). In October 1997, PST settled a lawsuit pertaining to Circuit Chemistry, and Ozite settled the Dalen litigation. The impact of both settlements was accounted for as discontinued operations (see Note 20(b) and Note 18). On November 11, 1997, the Company announced that it had signed an Agreement and Plan of Merger ("Agreement") with Tekni-Plex, Inc., ("Tekni-Plex") a privately-owned company, pursuant to which the Company would, through a merger ("Merger") become a wholly-owned subsidiary of Tekni-Plex. The Agreement provides that the owner of each share of common stock of the Company would receive $3.50 in cash for that share in the Merger. The Agreement and the Merger will be submitted to the shareholders of the Company for approval at the Company's annual shareholders' meeting expected to be held in January 1998. The Agreement and the Merger have been unanimously approved, and recommended to shareholders for adoption by the Company's Board of Directors. Officers and directors of the Company owning approximately 10% of the outstanding common stock of the Company have agreed to vote their shares in favor of the Merger. 19 The Agreement contains a number of conditions which must be satisfied in order for the Merger to occur, including the successful completion of a consent solicitation and tender offer for PST"s 11.25% Senior Secured Notes due 2003, the receipt of all necessary governmental and regulatory approvals, and the absence of any changes occurring prior to the closing date which would have a material adverse significance with respect to the value of the Company and its subsidiaries, taken as a whole. The Agreement also requires that the outstanding minority common shareholders' interest in PST be eliminated, either through purchase or a short-form merger procedure under Delaware law, not later than immediately prior to completion of the Merger, at a price of $7.00 per share of PST common stock. The Merger is further subject to the receipt by Tekni-Plex of sufficient financing to pay for the Company shares, purchase the PST Notes tendered in the tender offer, and fund all other cash requirements of the Merger. Tekni-Plex has received commitments from Morgan Guaranty Trust Company of New York to provide senior bank financing and subordinated bridge loans in an aggregate amount which the parties believe will be sufficient to complete the Merger, subject to a number of conditions. The Agreement is terminable by Tekni-Plex, the Company, or either of them under certain circumstances. In the event the Agreement is terminated because the Company's Board of Directors withdraws or materially modifies its approval or recommendation of the Merger or the Agreement or another person, entity or group acquires beneficial ownership of 50% or more of the outstanding shares of the Company's Common Stock, the Company is obligated to pay a fee of $10 million to Tekni-Plex and to reimburse Tekni-Plex for up to $5 million of its expenses in connection with the Agreement and related transactions. The Company expects the Merger to be completed in February 1998, but cannot assure that all of the conditions to the Merger will be satisfied. In connection with the Company's acceptance of the Tekni-Plex Offer, Tekni-Plex has also agreed to lend to PureTec Corporation $5,000, as discussed above. Future Capital Expenditure and Commitments The Company's businesses are relatively mature and as a result do not require significant ongoing additions to plant and equipment, except for the expansion discussed below. The Company generally finances its ongoing capital expenditure requirements from its cash flow provided from operations and borrowings under its Revolving Credit Facility. Construction has been completed on a new plant in Northern Ireland for the Company's Unichem division. For purposes of this new business venture, a new subsidiary has been formed, Colorite Europe Limited (a United Kingdom company). The total capital costs for the Company in connection with this new Unichem plant were approximately $6,000. The Company has received commitments for certain grants, subsidies and other inducements from government authorities in Northern Ireland. The Company has financed a large part of its capital costs of this new plant by using cash reserves (and possibly some additional borrowing from a commercial bank) at Action Belgium N.V. The Company is in the process of constructing a state-of-the-art recycling facility in Huntington, West Virginia. The facility is expected to open early in calendar 1998. The Company will invest approximately $8 million in the facility, which will recycle PET containers, such as soft drink bottles and food packaging. Management is still evaluating various financing alternatives for this new facility. In October 1997, the Company settled a lawsuit pertaining to Circuit Chemistry, a discontinued operation. Total settlement payments were $1,725 as of October 31, 1997. Additionally, in October 1997, in accordance with the Dalen litigation settlement, Ozite Corp. made two (2) payments of $500 each (see Note 20(b)). These payments were made out of the Company's current working capital. Management believes that it has a number of alternatives available to finance the final settlement payment of $2,250 related to Dalen by January 31, 1998. 20 Inflation Generally, the Company's operations have benefited from relatively stable or declining prices for raw materials. During 1997, the Company has benefited domestically from declining raw material costs. Foreign operations saw raw material costs continued to rise until they stabilized during the second quarter. Raw material costs have generally stabilized at this time In the event significant inflationary trends were to resume, management believes that the Company will generally be able to offset the effects thereof through continuing improvements in operating efficiencies and increasing prices, to the extent permitted by competitive factors. However, there can be no assurance that all such cost increases can be passed through to customers. Item 8. FINANCIAL STATEMENTS The financial statements commence on Page F-1. Supplementary data is not required to be presented. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 21 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names, ages and positions of the current directors and executive officers of PureTec. Name Age Position ---- --- -------- Fred W. Broling 62 Chairman of the Board and Chief Executive Officer David C. Katz 57 President, Chief Operating Officer and Director Murray Fox 74 Vice President and Director Leo Gans 71 Vice President and Director Robert Guyett 60 Director Werner Haase 59 Director Edward P. Hamway 49 Director Peter R. Harvey 62 Director John J. Harvey 66 Director Joseph T. Bruno 62 Vice President Thomas V. Gilboy 43 Vice President, Treasurer and Chief Financial Officer Paul Litwinczuk 44 Secretary Gerard R. Giordano 47 Asst. Secretary and Vice President Mr. Broling has served as the Chairman and Chief Executive Officer of the Company since July 26, 1995. Prior to that, Mr. Broling was a Vice President of PTIP. Mr. Broling has served as Chairman and President of PST since 1984 and as Chairman and Chief Executive Officer of Ozite since 1990. Prior to 1984, Mr. Broling served as President of the plastic specialty sector of Dart & Kraft. Mr. Katz has served as President of the Company since its inception and as President of PTIP since August 1988 and as a Director since September 1991. He was appointed Chief Operating Officer in February 1994. From 1987 until August 1988 he was an independent consultant to contract and food and beverage packers. From 1982 until 1987, he was Vice President and operations director for Taylor Wine Company, and was responsible for operation, distribution, purchasing and maintenance of the plant owned by Taylor Wine Company in Hammondsport, New York. From 1977 until 1982, he was U.S. manager of packaging for the Coca-Cola Company in Atlanta, Georgia and in 1978 and 1979 he coordinated the introduction of PET bottles to U.S. bottlers. Mr. Fox has been a Director of PTIP since September 1991 and of the Company since July 26, 1995. Mr. Fox also served as Secretary/Treasurer of PTIP from September 1991 until July 1995. Mr. Fox was also Secretary/Treasurer of REI Distributors, Inc. from 1981 until July 1995 and was a co-founder of that company. Mr. Fox is also President of Recycling Enterprises, Inc., a company engaged in glass recycling and fabrication of reprocessing equipment. Mr. Gans has been a Vice President and director of the Company since July 1995. Mr. Gans has served as Vice President since 1984 and was a director of PST from 1989 to June 1993. He has also served as President of PST's Action Technology Division since 1983. Mr. Guyett has been a director of the Company since 1996. Mr. Guyett serves as President, Chief Executive Officer of Crescent Management Enterprises, LLC. Mr. Haase has been a director of the Company since July 1995. Mr. Haase has been the Chief Executive Officer of Journeycraft, Inc., a privately held New York corporation involved in travel and sales promotion, since 1986. Mr. Haase served as a Director of PTIP from 1987 to 1991. Mr. Haase is also a director of Water-Jel Technologies, Inc., a publicly held company which develops, produces and markets products which provide emergency first aid on burns, and shields against heat and fires, and Multi-Media Tutorial Services, Inc., a publicly held company which develops and markets personal educational materials on videotape and CD-ROM formats. 22 Mr. Hamway has served as a director of the Company since November 1995. He has been Chairman of Round Hill Group, Ltd., a financial consulting firm, since March 1995. Prior to that he held various executive positions with IBJ Schroeder Bank & Trust Company. Mr. John Harvey has served as Director of the Company since July 1995. Mr. Harvey has served as a Director of Ozite since August 1990 and as a Director of PST since October 1993. He has also served as the Chairman of the Board and Chief Executive Officer of ARTRA Group Incorporated, a publicly held company which manufactures and markets fashion jewelry, flexible packaging and investments and as a director of The Lori Corporation (fashion jewelry) since 1985. Peter R. Harvey and John J. Harvey are brothers. Mr. Peter Harvey has served as Director of the Company since July 1995. Mr. Harvey has served as a Director since 1993. He has been a director of Ozite since 1984. He also has served as President, Chief Operating Officer and a director of ARTRA Group Incorporated since 1986, a director of The Lori Corporation since 1984, and a director of SoftNet Systems, Inc. since 1988. He was also Chief Executive Officer and Chairman of SoftNet from 1985 to 1993. Mr. Bruno has served as Vice President - Human Resources of the Company since April 1996 and has held the same position with PST since 1986. Prior thereto, from 1979 to 1985, he served as a Director and Vice President of Personnel for Wilson Fiberfil International, a division of Dart & Kraft. Mr. Gilboy has served as Vice President, Treasurer and Chief Financial Officer of the Company since May 1996. Previously (from 1991 to 1996) Mr. Gilboy had been Vice President and Chief Financial Officer of Troy Corporation, a specialty chemical company. Mr. Litwinczuk has served as Secretary of the Company since its inception. Mr. Litwinczuk has served as the Secretary of Ozite and PST since April 1996. He also served as Assistant Secretary of PTIP from September 1991 to July 1995. Prior to 1991, Mr. Litwinczuk was Administrative Manager with REI Distributors, Inc. Mr. Giordano has served as Vice President of Corporate Finance since February 1997 and was Vice president of Colorite since 1989. Previously (from 1983 - 1989) Mr. Giordano had been Vice President of Finance and Administration for Ingredient Technology, a division of Crompton & Knowles Corporation. PST is a subsidiary of Ozite, which is a wholly owned subsidiary of PureTec. Compensation Committee Interlocks and Insider Participation; Additional Information Compensation of executive officers is determined by the Company's Board of Directors. Messrs. Fred Broling and Peter R. Harvey currently serve on PST's Board of Directors and have served as directors and officers of PST and continue to serve Ozite in such capacities. Mr. Broling is currently employed as an officer of PST. See "Item 13. Certain Relationships and Related Transactions." Mr. Broling and Mr. Peter R. Harvey recommend to the Board of Directors compensation payable to executive officers of the Company. Mr. Broling's compensation is based on the actual performance of the Company compared to the operating plan. The compensation of Mr. Gans is determined in accordance with the performance of his operating division based on such plan. Messrs. Broling and Harvey consider the performance of the Company, among other factors, in determining the compensation of other executive officers; however, neither they nor the Board of Directors have adopted compensation policies applicable to such other executive officers. 23 Item 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE
Name and Fiscal Stock All Other Principal Position Year Salary Bonus Options Compensation (1) - ------------------ ------ ------ ----- ------- ---------------- Fred W. Broling 1997 $250,000 $250,000 100,000 $ 5,192 Chairman and Chief 1996 259,216 125,000 100,000 5,010 Executive Officer 1995 263,446 250,000 -- 11,232 David C. Katz 1997 165,000 165,000 100,000 4,362 President, Chief Operating 1996 152,385 75,000 -- 4,854 Officer, Director 1995 130,000 150,000 50,000 -- Leo Gans 1997 186,000 249,240 50,000 5,192 Vice President, Director, 1996 187,042 166,500 100,000 5,132 President of Action 1995 186,582 236,000 -- 9,987 Technologies Thomas V. Gilboy 1997 176,000 176,000 100,000 5,192 Vice President, Treasurer & 1996 31,067 40,000 100,000 -- Chief Financial Officer 1995 -- -- -- -- Robert E. Brookman, Ph.D. 1997 197,000 73,100 50,000 5,192 President - Colorite 1996 191,582 49,454 50,000 4,992 Polymers Division 1995 190,703 99,000 --- 4,992
- -------------------------- (1) The amounts in this column are contributions made by the Company to one of the Savings Plan for Employees of PureTec or its affiliates and the amount of premiums paid by the Company for life insurance policies for the benefit of the named executive officers. Director's Compensation Directors who are officers of the Company receive no compensation for serving as directors. Independent directors who serve on the compensation committee participate in the 1995 Disinterested Director Stock Option Plan and are paid a $10,000 annual fee. 24 Option/SAR Grants in Last Fiscal Year
Potential Potential Realizable Realizable Value at Value at Assumed Assumed Percent of Annual Annual Total Rates of Rates of Number of Options/ Stock Stock Securities SARs Price Price Under- Granted Apprecia- Apprecia- lying to Exer- tion for tion for Options/ Employees cise or Expi- Option Option SARs in Fiscal Base ration Term Term Name Granted Year Price Date 5% 10% - ---- ---------- ---------- ------- ------ ---------- ---------- Fred W. Broling 100,000 13.9% $2.25 8/01/2005 $97,153 $234,841 David C. Katz 100,000 13.9% $2.25 8/01/2005 97,153 234,841 Leo Gans 50,000 6.9% $2.25 8/01/2005 48,577 117,420 Thomas V. Gilboy 100,000 13.9% $2.25 8/01/2005 97,153 234,841 Robert E. Brookman 50,000 6.9% $2.25 8/01/2005 48,577 117,420
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options/SARs at Options/SARs at FY-End FY-end Shares Acquired Exercisable/ Exercisable/ Name on Exercise Value Realized Unexercisable Unexercisable - ---- --------------- -------------- ------------- ------------- Fred W. Broling --- --- 33,333/166,667 ---/--- David C. Katz --- --- 108,300/100,000 ---/--- Leo Gans --- --- 33,333/116,667 ---/--- Thomas V. Gilboy --- --- 33,333/166,667 ---/--- Robert E. Brookman --- --- 16,667/83,333 ---/---
25 Compensation Pursuant to PST Pension Plan Pensions for salaried personnel of the Company are provided through the Plastic Specialties and Technologies, Inc. And Affiliates Pension Plan, effective as of May 10, 1984 and amended January 1, 1988 (the "PST Pension Plan"). The following table illustrates the amount of the annual pension benefit payable under the PST Pension Plan to a person in the specified average salary and year-of-service classifications: PENSION PLAN TABLE Years of service ------------------------------------------------------- Remuneration 15 20 25 30 35 - ------------ ------- ------- ------- ------- ------- $100,000 $15,000 $20,000 $25,000 $30,000 $35,000 125,000 18,740 25,000 31,250 37,500 43,750 150,000 or more 22,500 30,000 37,500 45,000 52,500 For purposes of the PST Pension Plan, compensation is defined as the total wages, salaries, commissions, bonuses, overtime and special awards paid during the year. All cash compensation reported in the Summary Compensation Table under the columns "Salary" and "Bonus" is included in compensation under the Pension Plan (subject to the dollar limitation shown in the Pension Plan Table), for each officer listed. The estimated number of credited years of service of each of the executive officers listed in the Summary Compensation Table is as follows: Fred W. Broling, 21 years; Thomas V Gilboy, 1 year; Leo Gans, 15 years; Joseph T. Bruno; 18 years and Robert Brookman, 8 years. Mr. Katz is not presently covered by the PST Pension Plan. The PST Pension Plan provides a monthly benefit payable for life, beginning at age 65, equal to one-twelfth of one percent of the total compensation received during the period the employee participated in the PST Pension Plan. None of the PST Pension benefits are subject to any deduction for Social Security or other offset amounts. 26 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of the Company's voting securities as of October 14, 1997 by (i) each person who is known by the Company to own beneficially more than 5% of the Company's outstanding Common Stock; (ii) each of the Company's directors and named executive officers; and (iii) all officers and directors of the Company as a group (unless otherwise indicated, all addresses are c/o the Company, 65 Railroad Avenue, Ridgefield, New Jersey 07657): Common Stock Beneficially Owned Name and address Amount Percentage - ---------------- ------------ ------------------ Fred W. Broling (1) 1,484,086 4.7% David C. Katz (2) 118,200 * Murray J. Fox (3) 725,872 2.3% Leo Gans (1) 460,727 1.5% Robert Guyett (4) 40,000 * 20 Parsonage Hill Road Short Hills, NJ 07078 Werner Haase (5) 90,000 * 488 Madison Avenue New York, NY Edward Hamway (6) 23,000 * 174 Springfield Ave. Summit, NJ 07901 John J. Harvey (5) 1,889,302 6.0% 500 Central Ave. Northfield, IL 60093 Peter R. Harvey (5) 1,278,612 4.1% 500 Central Ave. Northfield, IL 60093 Thomas V. Gilboy (1) 43,733 * Paul Litwinczuk (7) 79,000 * All Officers and Directors as a Group (8) 6,232,532 19.6% - -------------------- * = Less than 1% (1) Includes shares issuable upon exercise of vested options to acquire 33,333 shares of Common Stock (2) Includes shares issuable upon exercise of vested options to acquire 108,300 shares of common stock (3) Includes 25,649 shares owned directly by Recycling Enterprises, Inc. Mr. Fox is a director, officer and principal shareholder of Recycling Enterprises, Inc. Also includes shares issuable upon exercise of vested options to acquire 50,667 shares of Common Stock. (4) Includes shares issuable upon exercise of vested options to acquire 10,000 shares of Common Stock. (5) Includes shares issuable upon exercise of vested options to acquire 30,000 shares of common stock (6) Includes shares issuable upon exercise of vested options to acquire 20,000 shares of common stock. 27 (7) Includes shares issuable upon exercise of vested options to acquire 79,000 shares of common stock (8) Includes shares issuable upon exercise of vested options to acquire an aggregate of 457,966 shares of common stock. 28 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Transactions with Related Companies PureTec held 772,000 shares of common stock of Artra (the "Artra Common Shares"), which was accounted for on the equity method. Through the Company's recording of its share of the net losses of Artra, the carrying value of the investment in the Artra Common Shares had been reduced to zero in the 1993 fiscal year. Peter R. Harvey and John Harvey are the controlling stockholders of Artra Group, Inc. ("Artra"). In addition, Peter R. Harvey is a director and the President and Chief Operating Officer of Artra, and John Harvey is a director and the Chairman of the Board and Chief Executive Officer of Artra. In 1987, the Company acquired from Bagcraft Corporation of America ("Bagcraft") a $5,000,000 subordinated note bearing interest at a rate of 13-1/2% per annum and 50,000 shares of 13-1/2% cumulative redeemable preferred stock with a liquidation preference of $5,000,000 for $10,000,000. Bagcraft is a wholly-owned subsidiary of BCA Holdings, Inc. ("BCA) and BCA is wholly-owned subsidiary of Artra. In March 1993, the Company received 675 shares of BCA Preferred Stock having a liquidation preference equal to the amount of interest due for the period from December 1, 1991 to November 30, 1992 ($675 in the aggregate) in lieu of receipt of payment of interest from Bagcraft for such period. In connection with the Merger, on July 31, 1995, PST declared a dividend of the 772,000 Artra Common Shares and 3,675 shares of BCA preferred stock to all stockholders of record as of July 31, 1995. Based on this declaration, 638,444 shares of Artra common stock and 3,039.23 shares of BCA Class A preferred stock have been transferred to Ozite. The Company is in the process of transferring 133,556 shares of Artra common stock and 635.77 shares of BCA preferred stock to minority stockholders that existed at the date of the declaration. In December 1993, PST received from Bagcraft 3,000 shares of BCA preferred stock as payment in full for unpaid interest due from Bagcraft. Indebtedness of Management to the Company During fiscal 1997, Mr. Broling was indebted to the Company in an amount of $252,000 consisting of principal and interest outstanding on a demand note dated June 15, 1988, bearing interest at 75% of the prime rate, not to exceed 10%. Such indebtedness was incurred by Mr. Broling to finance the purchase of common and preferred stock of the predecessor of Ozite. At October 31, 1997, the outstanding indebtedness was $252,000 During fiscal 1996, Mr. Brennan, the former Vice President, Chief Financial Officer and a Director, was indebted to PureTec in an amount of $150,800 consisting of principal and interest outstanding on; (i) a demand note dated June 15, 1988, bearing interest at 75% of the prime rate, not to exceed 10%; and (ii) a non-interest bearing demand note dated August 20, 1990. Such indebtedness was incurred by Mr. Brennan to finance the purchase of common and preferred stock of the predecessor of Ozite and to finance unreimbursed moving expenses incurred moving to Illinois at PureTec's request, respectively. Such amounts were outstanding at October 31, 1997. As of July 31, 1997, Mr. Peter R. Harvey was indebted to the Company in an amount of $717,000 consisting of principal and interest outstanding on a demand note dated May 20, 1988, bearing interest at the prime rate on the last day of each fiscal year. Such indebtedness was a personal loan to Mr. Harvey. As a potential offset to this indebtedness as of July 31, 1997, Mr. Broling and Mr. Harvey have notes payable to them by the Company in the amounts of $750,000 and $1,039,687 respectively. These notes are a result of the 1995 merger of Pure Tech International and Ozite, and were partial payment for Ozite Preferred Stock. The notes payable to Messrs. Broling and Harvey are non-interest bearing for the first four years. 29 Transaction with Fox Engineering, Inc. In September 1994, the Company sold 40% of the capital stock of Multiple Container Recycler, Inc. ("MCR") to a company owned by the son of a director and officer of the Company. The sale price was $1,000,000. The Company received a note for a total of $1,000,000 plus accrued interest payable. All acquired shares in MCR and 175,000 shares of previously acquired PureTec common stock, (which had a value approximating the note as of the date of sale) have been pledged as collateral against the loan. The Company recognized a gain of $1,000,000 on this transaction. In fiscal year 1997, the Company agreed to transfer the operations of MCR to its minority owners. Under the terms of the agreement, the operations, and all existing assets were transferred effective September 1, 1996. The existing liabilities as of that date were retained by the Company. Liabilities remaining at July 31, 1997 were approximately $100,000 Upon consummation of the agreement, 333,333 shares of PureTec stock were transferred to the Company in satisfaction of the $1,000,000 note. The Company incurred a loss of $312,000 in conjunction with this transaction. 30 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) Financial Statements and Schedules The financial statements listed in the Index to Financial Statements under Part II, Item 8 and the financial statement schedules listed under Exhibit 28 are filed as part of this annual report. (a)(2) Financial Statement Schedule - Schedule II - Valuation and Qualifying Accounts (a)(3) Exhibits The exhibits listed on the Index to Exhibits following the Signature Page herein are filed as part of this annual report or by incorporation by reference from the documents there listed. 31 SIGNATURES Pursuant to the requiremens of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PURETEC CORPORATION By: /s/ Thomas V. Gilboy ------------------------------------------ Thomas V. Gilboy Chief Financial Officer and Vice President Dated: November 13, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of Registrant and in the capacities indicated. /s/ Fred W. Broling - ----------------------------- Chairman of the Board and November 13, 1997 Fred W. Broling Chief Executive Officer /s/ David C. Katz - ----------------------------- Director, President and Chief November 13, 1997 David C. Katz Operating Officer /s/ Murray J. Fox - ----------------------------- Director November 13, 1997 Murray J. Fox /s/ Leo Gans - ----------------------------- Director and Vice President November 13, 1997 Leo Gans /s/ Robert Guyett - ----------------------------- Director November 13, 1997 Robert Guyett /s/ Werner Haase - ----------------------------- Director November 13, 1997 Werner Haase /s/ Edward Hamway - ----------------------------- Director November 13, 1997 Edward Hamway /s/ John J. Harvey - ----------------------------- Director November 13, 1997 John J. Harvey /s/ Peter R. Harvey - ----------------------------- Director November 13, 1997 Peter R. Harvey
32 Index To Exhibits Number Exhibit - -------------- 2.1 Agreement and Plan of Merger dated as of November 11, 1997 among PureTec Corporation, Plastic Specialties & Technologies, Inc., Tekni-Plex, Inc. And P.T. Holding, Inc. 3.1 Articles of Incorporation (incorporated by reference from Exhibit 3(a) of the Company's registration statement on Form S-4, file no. 33 - 82768). 3.2 By-laws (incorporated by reference from Exhibit 3(b) of the Company's registration statement on Form S-4, file no. 33 - 82768). 4.1 Form of Indenture among Holdings, PST and IBJ Schroder Bank & Trust Company, as Trustee, relating to the 13-1/8% Senior Subordinated Notes due 1997 (incorporated by reference from Exhibit 4.10 of Amendment No. 2 to PST's registration statement on Form S-1, file no. 33-11686). 4.2 Form of Specimen Senior Secured Note (incorporated by reference from Exhibit 4.10 of Amendment No. 2 to PST's registration statement on Form S-1, file no. 33-11686). 4.3 Form of 13% Convertible Senior Note among PureTec Corporation and Tekni-Plex, Inc. dated November 11, 1997. 10.1 Agreement and Plan of Merger, dated July 6, 1994 by and among PTI, the Company, Pure Tech Newco (PTI), Inc., Pure Tech Newco (Ozite), Inc., and Ozite (incorporated by reference from PTI's report on Form 8-K, filed with the Commission on July 13, 1994) and Amendments Nos. 1 to 4 thereto (incorporated by reference from Exhibit 2(a) of the Company's registration statement on Form S-4, file no. 33 - 82768). 10.2 Form of Amended and Restated Senior Loan Agreement dated as of November 8, 1993 between PST and General Electric Capital Corporation, as agent and lender (incorporated by reference from Exhibit 10.3 of Ozite's Annual Report on Form 10-K for the fiscal year ended July 31, 1993). 10.3 Plastic Specialties and Technologies, Inc. And Affiliates Pension Plan, Amended and Restated Effective as of January 1, 1985 (incorporated by reference from Exhibit 10.18 of PST's registration statement on Form S-1, no. 33-11686). 10.4 1995 Stock Option Plan (incorporated by reference from Exhibit 10(s) of the Company's registration statement on Form S-4, file no. 33 - 82768). 10.5 1995 Disinterested Directors' Stock Option Plan (incorporated by reference from Exhibit 10(u) of the Company's registration statement on Form S-4, file no. 33 - 82768). 10.6 Asset Transfer Agreement dated September 29, 1994 by and between Occidental Chemical Corporation, as amended October 5, 1994, October 14, 1994, May 24, 1995, and August 18, 1995 (incorporated by reference from Exhibit 2 of the Company's current report on Form 8-K filed September 1, 1995). 10.8 Lease, dated June 1989, between Richard C. Lauer and Roy I. Anderson, as lessor, and PST, as lessee, re: 19555 East Arenth Avenue, Industry California (incorporated by reference from Exhibit 28.1 of PST's quarterly report on Form 10-Q for the fiscal quarter ended October 31, 1992). 10.9 Lease, dated September 23, 1991, between E.T. Herman and Jane D. Herman 1978 Living Trust, as lessor, and the Colorite Plastics Division of PST, as lessee, re: 909 East Glendale Avenue, Sparks, Nevada (incorporated by reference from Exhibit 28.1 of PST's quarterly report on Form 10-Q for the fiscal quarter ended October 31, 1992). 10.10 Lease, dated January 1, 1993, between OHR Realty Corporation, as lessor, and PST, as lessee, re: Piscataway, New Jersey (incorporated by reference from Exhibit 28.1 of PST's quarterly report on Form 10-Q for the fiscal quarter ended October 1992). 10.11 Lease, dated April 24, 1972, between Pacific Western Warehouse, Inc. and Dark Industries, Inc. (assigned by Dart Industries, Inc. to PST) (incorporated by reference from Exhibit 10.8 to PST's registration statement on Form S-1, file no. 33-11686). 23.1 Consent of Deloitte & Touche LLP with respect to Registration Statment No. 33-98266 on Form S-8 and Registration Statement No. 33-98190 on Form S-3. 27 Financial Data Schedule 99 Form 8-K, dated June 30, 1997. 33 PURETEC CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Independent Auditors' Reports: Report of Deloitte & Touche LLP F-2 Report of Holtz Rubenstein & Co., LLP F-3 Consolidated Balance Sheets as of July 31, 1997 and 1996 F-4 Consolidated Statements of Operations for the years F-5 ended July 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity for the years F-6 ended July 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended F-7 - F-8 July 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements F-9 - F-39 Schedule II - Valuation and qualifying accounts F-40 Exhibit 23.1 - Independent Auditors' Consent F-41 All other schedules are not applicable and are therefore excluded. F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of PureTec Corporation Ridgefield, New Jersey We have audited the accompanying consolidated balance sheets of PureTec Corporation and subsidiaries (the "Company") as of July 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended July 31, 1997. Our audits also included the financial statement schedule listed in the index to the consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We did not audit the financial statements of Styrex Industries, Inc. ("Styrex") (a consolidated subsidiary) for the year ended July 31, 1995, which statements reflect total assets constituting 3% of the related consolidated totals for that year, and total revenues of continuing operations (reclassified to discontinued operations in 1997) constituting 40% of the related consolidated totals for that year. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Styrex for the year ended July 31, 1995, is based solely on the report of such other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of July 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Parsippany, New Jersey November 13, 1997 F-2 HOLTZ RUBENSTEIN & CO., LLP Certified Public Accountants Business Advisers Independent Auditors' Report September 12, 1995 (except for Note 6, as to which the date is November 9, 1995) To the Board of Directors and Stockholders of Styrex Industries, Inc. We have audited the accompanying statements of operations and deficit and cash flows of Styrex Industries, Inc. for the year ended July 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of Styrex Industries, Inc.'s operations and its cash flows for the year ended July 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 2 to the financial statements, the Company is a wholly-owned subsidiary of PTI Plastics, Inc. The Company has received funding from its parent in the form of loans and advances and at July 31, 1995 advances from its parent company approximated $3,373,000. /s/ Holtz Rubenstein & Co., LLP F-3 PURETEC CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data)
July 31, July 31, ASSETS 1997 1996 --------- --------- CURRENT ASSETS: Cash and cash equivalents $ 6,745 $ 5,995 Accounts receivable, less allowance for doubtful accounts of $1,154 as of July 31, 1997 and $980 as of July 31, 1996 56,736 53,675 Inventories 54,568 41,403 Prepaid expenses and other current assets 3,962 3,955 --------- --------- TOTAL CURRENT ASSETS 122,011 105,028 PROPERTY, PLANT AND EQUIPMENT, net 88,367 85,156 GOODWILL, net of accumulated amortization of $6,660 and $3,168 as of July 31, 1997 and 1996, respectively 90,192 92,570 OTHER INTANGIBLE ASSETS, net 44 1,344 OTHER ASSETS, net 11,209 12,592 --------- --------- TOTAL ASSETS $ 311,823 $ 296,690 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings $ 38,665 $ 20,170 Accounts payable 27,751 28,974 Accrued plant closing and disposal costs 2,263 3,901 Accrued expenses 25,809 24,947 Current portion of long-term debt 7,363 5,292 --------- --------- TOTAL CURRENT LIABILITIES 101,851 83,284 OTHER LONG-TERM LIABILITIES 3,464 2,923 PENSION AND POSTRETIREMENT LIABILITIES 8,274 7,882 DEFERRED INCOME TAXES 1,457 1,280 LONG-TERM DEBT 129,504 130,587 --------- --------- TOTAL LIABILITIES 244,550 225,956 COMMITMENTS AND CONTINGENCIES (See notes 8, 9, 11, 18 and 20) MINORITY INTEREST 96 26 STOCKHOLDERS' EQUITY Common stock, $.01 par value 50,000,000 authorized; 31,574,199 and 29,344,551 shares issued; 31,240,866 and 29,197,051 outstanding at July 31, 1997 and 1996, respectively 315 293 Preferred stock, $.01 par value 1,000,000 authorized; and no shares issued and outstanding - - Additional paid-in capital 132,520 129,606 Accumulated Deficit (61,462) (58,671) Minimum pension liability - (137) Cumulative foreign currency translation adjustment (3,509) (383) Treasury Stock (687) - --------- --------- TOTAL STOCKHOLDERS' EQUITY 67,177 70,708 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 311,823 $ 296,690 ========= =========
See notes to consolidated financial statements F-4 PURETEC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data)
Year Ended July 31, 1997 1996 1995 ------------ ------------ ------------ NET SALES $ 315,334 $ 326,344 $ 30,189 ------------ ------------ ------------ COSTS AND EXPENSES: Cost of goods sold 248,419 260,891 25,353 Selling, general and administrative 36,091 35,555 301 Amortization of intangible assets 3,553 3,705 2,148 Write-off of goodwill and obsolete assets/facilities - 4,636 7,403 Research and development 654 689 1,268 ------------ ------------ ------------ 288,717 305,476 36,473 ------------ ------------ ------------ INCOME (LOSS) FROM OPERATIONS 26,617 20,868 (6,284) OTHER EXPENSES (INCOME): Interest expense 18,108 18,702 419 Debt issuance cost and discount amortization 1,641 2,180 - Gain on sale and assignment of securities - - (1,000) Equity in loss of affiliates 1,824 2,175 2,050 Other, net 135 (419) (234) ------------ ------------ ------------ 21,708 22,638 1,235 ------------ ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST AND INCOME TAXES 4,909 (1,770) (7,519) Provision for income taxes 3,131 2,637 - ------------ ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST 1,778 (4,407) (7,519) MINORITY INTEREST (433) - - ------------ ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS 1,345 (4,407) (7,519) DISCONTINUED OPERATIONS: Loss from discontinued operations (1,226) (1,525) (4,580) Loss on disposal of discontinued operations (2,910) (2,241) (4,809) ------------ ------------ ------------ (4,136) (3,766) (9,389) NET LOSS $ (2,791) $ (8,173) $ (16,908) ============ ============ ============ INCOME (LOSS) PER COMMON SHARE: Income (loss) from continuing operations $ 0.05 $ (0.18) $ (0.42) Loss from discontinued operations (0.14) (0.14) (0.53) ============ ============ ============ Net loss $ (0.09) $ (0.32) $ (0.95) ============ ============ ============ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 29,429,415 27,268,435 17,751,141 ============ ============ ============
See notes to consolidated financial statements F-5 PURETEC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands, except per share data)
Treasury Common Shares Shares --------------------------------------------------- ----------- $.01 par $.05 par Amount Shares ----------- ----------- ----------- ----------- Balance July 31, 1994 - 14,922,673 $ 746 - Issuance of common stock in connection with acquisitions - 533,191 27 350,000 Exercise of stock options - 33,534 2 - Private placement, net of stock issuance expense of $420 - 3,332,737 167 - Debenture conversion - 1,714,780 86 - Issuance of common stock to settle liabilities - 113,890 5 - Reclassifications and adjustments - 76,636 3 - Conversion of common stock in connection with Merger 20,727,441 (20,727,441) (829) - Issuance of common stock in connection with Merger 5,705,555 - 57 - Issuance of common stock to settle expenses of Merger 450,000 - 5 - Net loss - - - - ----------- ----------- ----------- ----------- Balance July 31, 1995 26,882,996 - $ 269 350,000 Preferred stock conversion 1,606,688 - 16 - Private placement 585,000 - 6 - Debenture conversion 227,273 - 2 - Issuance of common stock to settle liabilities 9,286 - - - Contract requirements 33,308 - - - Common stock sales by Equity affiliate - - - (202,500) Minimum pension liability - - - - Foreign Exchange - - - - Net loss - - - - ----------- ----------- ----------- ----------- Balance July 31, 1996 29,344,551 - $ 293 147,500 Foreign exchange - - - - Receipt of share in settlement of note receivable - - - 333,333 Common stock sales by equity affiliate - - - (147,500) Other (5,382) - - - Private placement - PST exchange offer 2,235,030 - 22 - Reversal of minimum pension liability - - - - Net loss - - - - ----------- ----------- ----------- ----------- Balance July 31, 1997 31,574,199 - $ 315 333,333 =========== =========== =========== =========== Treasury Shares Preferred Shares ----------- ------------------------------ Additional Class A Paid-in Amount $.01 par Amount Capital ----------- ----------- ----------- ----------- Balance July 31, 1994 $ - - $ - $ 66,607 Issuance of common stock in connection with acquisitions - - - 808 Exercise of stock options - - - 44 Private placement, net of stock issuance expense of $420 - - - 12,573 Debenture conversion - - - 7,285 Issuance of common stock to settle liabilities - - - 433 Reclassifications and adjustments - - - (3) Conversion of common stock in connection with Merger - - - 829 Issuance of common stock in connection with Merger - - - 32,122 Issuance of common stock to settle expenses of Merger - - - 2,526 Net loss - - - - ----------- ----------- ----------- ----------- Balance July 31, 1995 $ - - $ - $ 123,224 Preferred stock conversion - - - 3,782 Private placement - - - 994 Debenture conversion - - - 998 Issuance of common stock to settle liabilities - - - 121 Contract requirements - - - - Common stock sales by Equity affiliate - - - 487 Minimum pension liability - - - - Foreign Exchange - - - - Net loss - - - - ----------- ----------- ----------- ----------- Balance July 31, 1996 $ - - $ - $ 129,606 Foreign exchange - - - - Receipt of share in settlement of note receivable (687) - - - Common stock sales by equity affiliate - - - - Other - - - - Private placement - PST exchange offer - - - 2,914 Reversal of minimum pension liability - - - - Net loss - - - - ----------- ----------- ----------- ----------- Balance July 31, 1997 ($ 687) - $ - $ 132,520 =========== =========== =========== =========== Minimum Total Accumulated Foreign Pension Stockholders' Deficit Exchange Liability Equity ----------- ----------- ----------- ----------- Balance July 31, 1994 ($ 33,066) $ - $ - $ 34,287 Issuance of common stock in connection with acquisitions - - - 835 Exercise of stock options - - - 46 Private placement, net of stock issuance expense of $420 - - - 12,740 Debenture conversion - - - 7,371 Issuance of common stock to settle liabilities - - - 438 Reclassifications and adjustments - - - - Conversion of common stock in connection with Merger - - - - Issuance of common stock in connection with Merger - - - 32,179 Issuance of common stock to settle expenses of Merger - - - 2,531 Net loss (16,908) - - (16,908) ----------- ----------- ----------- ----------- Balance July 31, 1995 ($ 49,974) $ - $ - $ 73,519 Preferred stock conversion (524) - - 3,274 Private placement - - - 1,000 Debenture conversion - - - 1,000 Issuance of common stock to settle liabilities - - - 121 Contract requirements - - - - Common stock sales by Equity affiliate - - - 487 Minimum pension liability - - (137) (137) Foreign Exchange - (383) - (383) Net loss (8,173) - - (8,173) ----------- ----------- ----------- ----------- Balance July 31, 1996 ($ 58,671) ($ 383) ($ 137) $ 70,708 Foreign exchange - (3,126) - (3,126) Receipt of share in settlement of note receivable - - - (687) Common stock sales by equity affiliate - - - - Other - - - - Private placement - PST exchange offer - - - 2,936 Reversal of minimum pension liability - - 137 137 Net loss (2,791) - - (2,791) ----------- ----------- ----------- ----------- Balance July 31, 1997 ($ 61,462) ($ 3,509) $ - $ 67,177 =========== =========== =========== ===========
See notes to consolidated financial statements F-6 PURETEC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Years Ended July 31, 1997 1996 1995 -------- -------- -------- NET CASH FLOWS FROM OPERATING ACTIVITIES: Income (loss) from continuing operations $ 1,345 $ (4,407) $ (7,519) Adjustments to reconcile net loss to net cash used in operating activities from continuing operations: Depreciation and amortization 13,780 13,427 2,861 Gain (Loss) on disposal of property and equipment (17) 598 (8) Gain on sale and assignment of securities - - (1,000) Write-off of obsolete equipment and costs - 4,636 4,617 Write-off of goodwill and other intangible assets 976 - 6,493 Bad debt allowance 182 879 129 Deferred income tax benefit 471 80 (377) Minority interest in consolidated subsidiaries 433 (3) (114) Equity in loss of affiliates 1,824 2,175 2,050 Changes in operating assets and liabilities net of effects from acquisition: (Increase) decrease in assets: Accounts receivable (9,361) (8,381) (379) Accounts receivable factored 2,087 - - Inventories (15,864) 4,288 958 Prepaid expenses and other current assets (20) (1,519) 833 Other assets (2,770) 7,199 (2,335) Increase (decrease) in liabilities: Accounts payable 1,804 4,226 1,594 Accrued plant closing and disposal costs (1,638) (1,784) (2,350) Accrued expenses 1,183 9,272 1,461 Other liabilities 2,636 768 - NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES -------- -------- -------- FROM CONTINUING OPERATIONS (2,949) 31,454 6,914 -------- -------- -------- Loss from discontinued operations (4,136) (3,766) (9,389) Depreciation of discontinued injection molding operation 754 1,123 1,291 Change in net operating assets of discontinued operations 887 - 2,773 -------- -------- -------- NET CASH USED IN OPERATING ACTIVITIES FROM DISCONTINUED OPERATIONS (2,495) (2,643) (5,325) -------- -------- -------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (5,444) 28,811 1,589 -------- -------- -------- (Continued)
See notes to consolidated financial statements F-7 PURETEC CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands)
Years Ended July 31, 1997 1996 1995 -------- -------- -------- NET CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (11,291) (10,509) (2,387) Additions to intangibles - - (2,776) Purchase of net assets (22,328) (155) Proceeds from the sale of property, plant, & equipment 27 1,368 - Purchase of Ozite Corporation, net of cash acquired of $4,741 - - (8,759) Investment used for Burlington purchase - - - -------- -------- -------- NET CASH USED IN INVESTING ACTIVITIES (11,264) (31,469) (14,077) -------- -------- -------- NET CASH FLOWS FROM FINANCING ACTIVITIES: Borrowing (repayments) under revolving credit facility and short-term borrowing, net 19,964 (10,840) (869) Proceeds from long-term debt 4,150 18,630 687 Repayments of long-term debt (5,292) (7,056) (2,227) Proceeds from private placements and sale by equity affiliate - 1,487 12,758 Proceeds from warrant/option exercise 1 - 46 Proceeds from the sale of debentures - - 8,371 -------- -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 18,823 2,221 18,766 -------- -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,365) (665) - -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 750 (1,102) 6,278 CASH AND CASH EQUIVALENTS, beginning of the period 5,995 7,097 819 -------- -------- -------- CASH AND CASH EQUIVALENTS, end of period $ 6,745 $ 5,995 $ 7,097 -------- -------- -------- -------- -------- -------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 17,849 $ 22,113 $ 1,054 Income taxes 3,301 2,557 - Non-cash transactions: Debenture conversion - 1,000 - Preferred Stock conversion - (3,274) - Issuance of common stock to settle liabilities - 121 438 Issuance of common stock in connection with acquisitions - 835 Issuance of common stock in connection with the Merger 34,710 Capitalized lease Colorite Europe Limited premises 3,784 - - Acquisition of treasury stock to settle note payable (687) - - Issuance of common stock in connection with PS&T Exchange Offer 2,936 - - Goodwill in connection with PS&T tender offer 2,316
See notes to consolidated financial statements F-8 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 1. ORGANIZATION, DESCRIPTION OF BUSINESS AND ACQUISITIONS PureTec's principal businesses are the manufacturing of garden hose, specialty plastic compounds and fabricated precision plastic components for niche consumer and industrial markets, the manufacturing of dispersion (plastisol) and specialty suspension (copolymer and blending) polyvinyl chloride ("PVC") resins and the recycling of plastics. The Company services its markets through its network of 21 manufacturing facilities, located in key points throughout the United States, with three locations in Europe and one in Canada. At the shareholders' meeting on May 1, 1996, Pure Tech International Inc., changed its name to PureTec Corporation. PureTec Corporation (the "Company" or "PureTec") was formed in July 1994 for the express purpose of becoming the parent of PTI Plastics, Inc. ("PTIP") and Ozite Corporation ("Ozite"). On July 26, 1995, the respective shareholders of PTIP and Ozite approved the merger of each of their corporations with wholly-owned subsidiaries of the Company (the "Merger"), effective at the close of business on July 31, 1995. PTIP and Ozite are now wholly-owned subsidiaries of the Company. For accounting purposes , the Merger has been accounted for as a purchase of Ozite by PureTec. For financial reporting purposes, the results of operations, and the statement of cash flows for the year ended July 31, 1995 are those of PTIP. The balance sheet information as of July 31, 1997 and 1996 and the results of operations and the statement of cash flows for the years ended July 31,1997 and 1996 reflect the combined entities, including Ozite. In connection with these mergers, holders of Ozite Common Stock received an aggregate of 1,028,915 shares of PureTec Common Stock. Holders of Ozite Preferred Stock received an aggregate of 4,627,317 shares of PureTec Common Stock. A portion of the securities otherwise issuable to Ozite preferred stockholders were instead issued to creditors of Ozite. Holders of Ozite Preferred Stock also received 5,000 shares, with a $5,000 redemption value, of a new class of PureTec's non-convertible preferred stock (See Note 13 (a)) and $3,750 in 10-year subordinated notes. The principal of the subordinated notes will be payable at maturity. Interest on the subordinated notes will accrue at 7% and is payable quarterly, except that no interest will accrue during the first four years. PTIP owned 300,000 shares of Ozite Class A Preferred Stock and did not participate in the distribution of PureTec securities pursuant to the Merger. Holders of PTIP Common Stock received PureTec's Common Stock on a one-for-one basis for approximately 78% of PureTec's total outstanding voting securities after the Merger. In connection with the Merger, PureTec issued 450,000 shares of Common Stock in consideration for investment banking and finders services, 15,684 shares of Common Stock to Ozite directors and officers in satisfaction of outstanding options to acquire Ozite Common Stock and 33,639 shares of Common Stock to holders of certain Ozite warrants who elected to receive such shares in exchange for their Ozite warrants. A summary of the transaction is as follows (reflecting the final adjustments to the transaction made in 1996): Fair Value of Net Assets Acquired: Current assets $ 90,086 Non-current assets 72,368 Liabilities assumed (189,036) ----------- (26,582) Consideration Given: 6,155,555 Common shares including expenses 34,710 Preferred Stock and subordinated notes issued 4,393 Cash and other amounts due 26,022 ----------- 65,125 ----------- Goodwill (being amortized over 30 years) $ 91,707 =========== F-9 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) Ozite is the majority stockholder of Plastic Specialties and Technologies, Inc. ("PST") and a 100% shareholder of Burlington Resins, Inc. (See below). On June 27, 1997, PureTec completed a private placement offer for most of the stock of PST not already owned, in exchange for new unregistered shares of PureTec common stock that were privately placed by PureTec. Prior to the completion of the exchange offer, PureTec, through its ownership of Ozite, indirectly owned 82.7% of the outstanding common stock of PST. In the exchange offer, PureTec, through Ozite offered to exchange two new unregistered shares of PureTec common stock for each share of PST common stock validly tendered . In total, 1,117,515 shares, or 13.4%, of the PST common stock outstanding were accepted for exchange by Ozite in the private exchange offer. The transaction was accounted for as a step-acquisition by the Company, and resulted in an increase to goodwill of approximately $2,300. As of July 31, 1997, Ozite owned approximately 96% of the outstanding common stock of PST. Burlington Resins, Inc. ("Burlington") is a special purpose subsidiary of the Company. Burlington was formed on September 26, 1994 for the express purpose of acquiring substantially all of the assets and assuming all of the liabilities of Occidental Chemical Corporation's ("OxyChem") specialty PVC resin manufacturing facility location in Burlington, New Jersey. On August 18, 1995, Burlington completed the acquisition from OxyChem, which was accounted for as a purchase, and commenced operations. In June 1997, the Company filed suit against OxyChem, alleging that certain postretirement benefit liabilities were substantially understated at the acquisition date. In August 1997, the Company and OxyChem agreed to settle this litigation. Pursuant to the terms of the settlement agreement, the Company has agreed to release OxyChem from any claim related to this liability in exchange for OxyChem's agreement to settle a $4 million subordinated term loan including accrued interest ("seller financing") for $3 million. A portion of the settlement has been accounted for as an adjustment to the purchase price, with the offset recorded against goodwill, with the remainder adjusting accrued interest based upon the seller financing. A summary of the original transaction and the adjustments made as of July 31, 1997 are as follows: As originally As reported recorded Adjustments herein ------------- ----------- ----------- Fair Value of Net Assets Acquired: Current assets $ 8,217 $ -- $ 8,217 Non-current asset 21,495 -- 21,495 Liabilities assumed (5,877) -- (5,877) --------- --------- --------- 23,835 -- 23,835 --------- --------- --------- Consideration Given: Seller financing 4,000 (1,476) 2,524 Cash and other amounts due 22,934 -- 22,934 --------- --------- --------- 26,934 (1,476) 25,458 --------- --------- --------- Goodwill (being amortized over 30 years) $ 3,099 $ (1,476) $ 1,623 ========= ========= ========= Under the terms of the Asset Transfer Agreement, OxyChem has indemnified Burlington for a period of eight years from any environmental liability arising from conditions existing prior to August 18, 1995. Any liabilities arising in the first five years subsequent to August 18, 1995 will be 100% indemnified, and any liability through year eight will be 50% F-10 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) indemnified. Management has not identified any material environmental matter, nor has Burlington been identified as a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) and corresponding state acts, in connection with any such matter. As discussed in Note 18, on November 11, 1997 the Company entered into a Merger Agreement with Tekni-Plex, Inc. ("Tekni-Plex"). Subject to the approval of a majority of the shareholders at a shareholders' meeting that the Company will arrange, the Merger Agreement contemplates Tekni-Plex (i) purchasing all of the Company's outstanding Common Stock for cash consideration of $3.50 per share, and (ii) assuming or refinancing all of the Comapny's debt. The Merger Agreement and the Acquisition have been unanimously approved and recommended to shareholders for adoption by the Company's Board of Directors. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All significant intercompany accounts and transactions are eliminated. b. Cash and Cash Equivalents Cash and cash equivalents consist of demand deposits, commercial paper, time deposits, and cash on hand. For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents. c. Inventories Inventories are valued at the lower of cost (determined by the first-in, first-out method) or market. d. Goodwill Goodwill, which relates primarily to the acquisition of Ozite, is being amortized on a straight-line basis over the period expected to benefit, which is estimated to be 30 years for current acquisitions and 10 to 40 years for acquisitions prior to July 31, 1995. The Company continually assesses the recoverability of its intangible assets by determining whether the amortization of the excess of the cost of the investment balance over its remaining useful life can be recovered through projected undiscounted future cash flows. The amount of goodwill impairment, if any, is measured based on projected undiscounted future cash flows in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Based on the Company's projected results of operations over the remaining useful life, management believes that there has not been an impairment in the value of the goodwill. e. Property, Plant and Equipment Property, plant and equipment is stated at cost and is primarily depreciated by the straight-line method over the estimated useful lives of the related assets. Repairs and maintenance are charged to expense as incurred. Leasehold improvements are depreciated over the lesser of the term of the lease, including renewal options, or the useful life of the asset. Depreciation is calculated using the modified units of production method for Burlington machinery and equipment. F-11 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) Costs of the construction of certain long-term assets include capitalized interest which is amortized over the estimated useful life of the related asset. The Company capitalized interest costs of $290 and $220 in 1997 and 1996, respectively. The principal estimated useful lives are as follows: Building and improvements 20-31 years Machinery and equipment 5-15 years Office equipment, furniture and fixtures 5-10 years In the event that facts and circumstances indicate that the cost of assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated fair value associated with the asset would be compared to the asset's carrying amount to determine if a write-down to fair value is required. f. Intangible Assets Other intangible assets are amortized using the straight-line method over the following periods (See Note 6): Process technology 10-20 years Customer list 7 years Other 5 years g. Deferred Financing Costs The financing costs incurred in securing debt are deferred and amortized over the life of the related debt (See Notes 7, 8 and 11). h. Income Taxes The Company files a consolidated federal income tax return including all of its qualifying domestic subsidiaries. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. i. Revenue Recognition The Company recognizes revenue when goods are shipped to customers. The Company provides for returned goods and volume rebates on an estimated basis. j. Foreign Subsidiaries The Company translates financial statements denominated in foreign currency by translating balance sheet accounts at the end of the period exchange rate and statement of operations accounts at the average exchange rate for the period. Translation gains and losses are recorded in stockholders' equity, and transaction gains and losses are reflected in income. k. Foreign Exchange Contracts During fiscal 1997, the Company's Belgian subsidiary entered into forward foreign exchange contracts to hedge intercompany payables and non Belgian Franc accounts receivables and payables. Market value gains and losses on such F-12 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) contracts are currently recognized, and the resulting credit or debit offsets foreign exchange gains or losses on the related balance sheet accounts. No significant forward foreign exchange contracts were outstanding at July 31, 1997 and July 31, 1996. l. Stock Based Compensation In 1997, the Company adopted SFAS No. 123, "Accounting for Stock Based Compensation". SFAS No. 123 addresses the financial accounting and reporting standards for stock based compensation plans and permits an entity to record the effects of stock based employee compensation plans in its financial statements or present proforma disclosures in the notes to the financial statements. Compensation expense associated with awards to non-employees is required to be measured using a fair value method. The Company has elected to continue to account for employee compensation plans in accordance with Accounting Principles Board Opinion No. 25 and has provided appropriate disclosures in the notes to the consolidated financial statements. m. Income (Loss) Per Common Share Income (loss) per common and common equivalent share is computed based upon the weighted-average number of shares and common share equivalents outstanding during the period. The calculation does not give effect to the conversion of options and warrants to purchase common stock when such securities have an anti-dilutive effect. Net loss per common share is based upon the weighted-average number of shares outstanding, as the impact of common share equivalents is anti-dilutive. Primary earnings per share and fully diluted earnings per share, are the same for all periods presented. In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share". This new standard, which supersedes APB Opinion No. 15, requires dual presentation of basic and diluted earnings per share ("EPS") on the face of the income statement and a reconciliation of the income available to common stockholders and weighted-average shares of the basic EPS computation to the income available to common stockholders and weighted-average shares plus dilutive potential common shares of the diluted EPS computation. The objective of the statement is to make the computation more comparable with international accounting standards. SFAS 128 is effective for periods ending after December 15, 1997 (the Company's 1998 fiscal year). SFAS No. 128 will require the Company to restate amounts previously reported as EPS to comply with the new pronouncement. Had SFAS No. 128 been in effect for the years ended July 31, 1997, 1996 and 1995, reported EPS would not have been different from that reported under APB Opinion No. 15. n. Other Recent Accounting Pronouncements In February 1997, the FASB issued Statement of Financial Accounting Standards No. 129, "Disclosure of Information about Capital Structure" ("SFAS No. 129"). SFAS No. 129 requires companies to disclose descriptive information about securities and information about the liquidation preferences of preferred stock and redeemable stock. SFAS 129 is effective for financial statements for periods ending after December 15, 1997 (the Company's fiscal 1998 year). In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No.130"). SFAS No. 130 requires companies to display, with the same prominence as other financial statements, the components of other comprehensive income. SFAS No. 130 requires that an enterprise classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997 (the Company's 1999 fiscal year). Reclassification of financial statements for earlier periods provided for comparative purposes is required. F-13 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 requires that an enterprise disclose certain information about operating segments. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997 (the Company's 1998 fiscal year). The Company has not determined the impact, if any, on the financial statements or related matters of adopting these pronouncements. o. Investment in Unconsolidated Affiliates The Company's investments in affiliated companies which are not majority owned or controlled are accounted for using the equity or cost method. Investments recorded under these methods and the percentage interest owned consist of Masplas International (25%), Les Plastiques Petco, Inc. (49%), and Evolutions, Inc. (42%). p. Environmental Costs Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to existing conditions caused by past operations and that do not contribute to current or future revenue generation are expensed. No costs relating to existing conditions caused by past operations were incurred by the Company during the periods ended July 31, 1997, 1996, or 1995. Reserves for estimated costs are recorded when environmental remedial efforts are probable and the costs can be reasonably estimated. In determining the reserves, the Company uses the most current information available, including similar past experiences, available technology, regulations in effect, the timing of remediation and cost sharing arrangements. No environmental reserves are required at July 31, 1997 and 1996. q. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates. r. Reclassifications Certain reclassifications have been made to the 1996 and 1995 financial statements to conform to the 1997 presentation. 3. INVESTMENTS a. In June 1994, the Company acquired an 80% interest in Evolutions, Inc. ("Evolutions"), a marketing company focusing on consumer apparel products manufactured from recycled material. The Company acquired newly issued shares of Evolutions for cash and 153,850 shares of the Company's common stock, valued at $4.55 per share (aggregating approximately $700). The aggregate value of the acquisition was approximately $850. On March 1, 1995, the Company acquired an additional interest in Evolutions, bringing its ownership up to 88%. The additional investment was 350,000 shares of the Company's common stock, valued at $1,925 and provided for the cancellation of any and all stock options outstanding prior to the acquisition. All shares issued by the Company for the investment are considered as treasury shares until sold to third parties. Such shares are then recognized as issued. During fiscal 1996, the Company's ownership percentage fell below 50% and the Company began accounting for this investment using the equity method. The F-14 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) statements of operations for all periods presented have been restated to reflect this change in the reporting entity. As a result of evaluating the operations and financial position of Evolutions, the Company wrote-off the carrying value of its investment in Evolutions, recording a charge of approximately $800 to equity in loss of affiliates during 1997. b. In August 1994, the Company completed a transaction whereby it acquired a 49% interest in Les Plastiques Petco, Inc., a Canadian corporation ("Petco"). In consideration for this interest, the Company issued 183,191 shares of Common stock valued at $817 (and issued an additional 33,308 shares in fiscal 1996 as the market price of the stock did not meet certain market price requirements), canceled $800 owed to the Company for equipment previously sold to Petco and its affiliate by the Company and agreed to provide additional equipment valued at $250. During fiscal 1995, the Company made an additional cash investment in Petco of $155. The Company and Petco also entered into a ten-year supply agreement whereby Petco, in exchange for the cancellation of approximately $783 owed to the Company by a Petco affiliate, will make available to the Company at least six million pounds of post-consumer PET annually. The carrying value of the supply contract was reduced to zero during 1997 as the future benefit to be provided by the asset was uncertain. During 1997, the Company's investment in Petco increased by $446 due to the conversion of a note receivable into additional preferred shares. Prior to 1997, the Company accounted for this investment using the equity method. During 1997, due to the level of influence the Company exerts over the operations of Petco, the Company changed its method of accounting from the equity to the cost basis. c. In August 1994, the Company completed a transaction whereby it acquired a 25% interest in Masplas International, Compose de Plastique Inc. a Canadian corporation ("Masplas") by converting $375 of a note receivable. Masplas is a recycler of post-consumer PET, and is controlled by the same majority shareholder as Petco. Prior to 1997, the Company accounted for this investment using the equity method. During 1997, due to the level of influence the Company exerts over the operations of Masplas, the Company changed its method of accounting from the equity to the cost basis. 4. INVENTORIES July 31, July 31, 1997 1996 -------- -------- Raw materials and supplies $ 22,353 $ 16,028 Recycled material 779 1,944 Work-in-process 1,288 2,074 Finished goods 30,148 21,357 --------- --------- $ 54,568 $ 41,403 ========= ========= 5. PROPERTY, PLANT AND EQUIPMENT July 31, July 31, 1997 1996 --------- -------- Land and land improvements $ 12,336 $ 13,138 Buildings and leasehold improvements 18,416 15,361 Machinery and equipment 64,116 60,610 Furniture and fixtures 2,577 2,727 Construction in progress 5,466 5,312 Property under lease 1,200 1,200 ---------- ----------- 104,111 98,348 Accumulated depreciation (15,744) (13,192) ---------- ----------- $ 88,367 $ 85,156 ========== =========== F-15 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 6. INTANGIBLE ASSETS July 31, July 31, 1997 1996 -------- -------- Process Technology $ 108 $ 1,179 Customer list 770 770 Other 87 870 -------- ---------- 965 2,819 Accumulated amortization (921) (1,475) -------- ---------- $ 44 $ 1,344 ======== ========== During fiscal 1997, the Company has written off the Petco supply contract in the amount of $541 (net of $242 of accumulated amortization) and licenses related to the bottlewash system in the amount of $380 (net of accumulated amortization of $691). 7. OTHER ASSETS July 31, July 31, 1997 1996 --------- -------- Deferred financing costs (net of accumulated amortization of $3,769 and $2,688 at July 31, 1997 and 1996, respectively) $ 3,826 $ 4,566 Investments in affiliates (a) 2,635 3,097 Other 2,608 2,419 Grants (b) 985 -- Notes receivable 45 1,405 Notes and interest receivable from officers (c) 1,110 1,105 -------- -------- $ 11,209 $ 12,592 ======== ======== (a) Represents the investment in Masplas International and Petco. (See Note 3.) (b) Represents a grant receivable from a government agency in Northern Ireland, related to the start-up of Colorite Europe Limited. (c) The notes and interest receivable from current and former officers of $393 and $388 at July 31, 1997 and 1996, respectively, are due on demand and bear interest at rates generally ranging from 75% of the prime rate to the prime rate of interest. These notes receivable relate primarily to the purchase of common and preferred stock of the predecessor of Ozite, un-reimbursed moving expenses and a personal loan. In addition, a note and interest receivable of $717 is due from a stockholder of PureTec and a former director of Ozite. 8. SHORT-TERM BORROWINGS (a) Revolving Credit Advances: On December 30, 1992, PST entered into a $50,000 Senior Loan Agreement (the "Agreement") with a commercial lending company ("CLC"). The Agreement contains covenants, the most restrictive of which are maintenance of certain financial ratios, prohibition of the occurrence of additional indebtedness, the payment of dividends, certain related party transactions and limitations on capital expenditures. Borrowings under the Agreement are secured by substantially all the F-16 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) domestic current assets of PST. Additionally, the CLC has a security interest in PST's intangible assets, and this security interest ranks pari passu with the security interest of the Senior Secured Notes (see Note 11) in PST's intangible assets. Revolving credit advances under the Agreement are based on eligible receivables and inventory. Effective January 31, 1997, PST amended this Agreement with the CLC ("Amended Agreement"), representing the fourth amendment to the Agreement. The Amended Agreement provides, among other things, for revolving credit advances of up to $50,000 through July 31, 2000 and letters of credit of up to $1,000. The Amended Agreement provides for certain pricing performance adjustments based on defined Performance Ratios. The Company will pay interest at a defined Index Rate plus the Applicable Revolver Index Margin (ranging from 0.00% to 0.25%) or, at the election of PST, the LIBOR Rate plus the Applicable LIBOR Margin (ranging from 2.50% to 3.00%). The Amended Agreement also provides that outstanding revolving credit advances shall not exceed $20,000 for 30 consecutive days during the period from July 1 to September 30 for each year. Furthermore, the Amended Agreement provides that domestic capital expenditures are limited to $8,500, $9,000 and $9,500 in fiscal years ending 1997, 1998 and 1999 (and each fiscal year thereafter), respectively. The Company also has the right to cancel the Agreement on 30 days written notice and pay the CLC an early termination fee of $175 if such cancellation occurs prior to January 31, 1998, and $100 if cancellation occurs on or after January 31, 1998 and prior to September 30, 1998. At July 31, 1997, the Company was not in compliance with certain of the covenants of the Amended Agreement, including the requirement to reduce borrowing to $20 million and the limitation on capital expenditures. The CLC has provided a waiver of this non-compliance as of July 31, 1997. At July 31, 1997 and 1996, borrowings under the Amended Agreement with the CLC totaled $36,772 and $14,138, respectively. Amounts outstanding are classified as current liabilities. In addition, on January 31, 1997, PST signed a Receivables Agreement with the CLC that provides PST with the ability to sell a 100% ownership interest, without recourse, in certain Eligible Receivables generated by PST. The CLC's commitment to purchase said receivables from PST are restricted to the period beginning each February 1 and ending on each May 31. The aggregate invoice face amount of purchased receivables will not exceed $12,000. PST is obligated to service the Eligible Receivables that it sells to the CLC. At July 31, 1997, PST is obligated to collect and remit $2,087 to the CLC for Eligible Receivables sold without recourse. The CLC owes PST $422 related to such receivables. (b) Revolving Credit Facility: In connection with the acquisition from OxyChem, Burlington has entered into a Credit Agreement (the "Agreement") with a bank that includes a revolving credit facility for up to $5,500 based on specified levels of eligible inventory and accounts receivable. Interest on this facility, which expires on August 18, 2002, is the prime rate plus 1.25 % and is due quarterly. The Agreement also contains a contingent fee agreement, payable annually, based on earning levels obtained. The Agreement has been amended by Burlington and the bank to provide for certain developments at Burlington. Outstanding borrowings are $1,893 and $2,193 at July 31, 1997 and 1996, respectively. The Agreement contains certain covenants, the most restrictive of which pertain to the maintenance of certain financial ratios, prohibition of the incurrence of additional indebtedness, the payment of dividends, and certain related party transactions. Borrowings under the Agreement are secured by substantially all the assets of Burlington. As of July 31, 1997, Burlington was not in compliance with certain covenants of the Agreement. The Company has received a waiver for the period of time that the default existed. The Company intends to repay the borrowings outstanding under the Agreement during fiscal 1998, and as such, has included the revolving credit facility as a current liability at July 31, 1997. F-17 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 9. PLANT CLOSING COSTS In October 1993, the Company decided to consolidate its plastic recycling operations. In connection with this consolidation, the Company closed substantially all of its operations in Lawrence Township, New Jersey. Costs associated with the shut down of this facility consisted of labor during the phase-out period, rubbish removal and clean-up costs and associated overhead for the dismantling and moving of equipment as well as future rental costs under noncancellable operating leases. In July 1995, the Company adjusted the carrying value of all remaining assets to their net realizable value including the write-off of $3,262 of costs associated with the Lawrence Township Plant which no longer have any value. In addition, in July 1995, the Company wrote off $210 of abandoned equipment relating to its old corporate office located at the Lawrence Township location as a result of the move to its new quarters. At July 31, 1997 and 1996, the Company has $196 and $430 accrued, respectively, relating to the lease which expires on June 30, 1998. This reserve is included in accrued plant closing and disposal costs. In July 1995, the Company wrote off equipment of $1,145 at its Springfield, Massachusetts plant related to the original wash system as the Plant was completely modified with an expansion of the "Pure Tech Process" system in fiscal 1995. The Company has no future plans for the old system, and was unsuccessful in attempts to sell the system. In July 1996, the Company evaluated the operations of its Springfield plant and decided to close it. In connection with this plant closing, the Company ceased substantially all operations except for minor production and clean-up that was completed in fiscal 1997. The Company accrued for all costs associated with the shut down of this facility, which consisted of clean-up costs, the breakdown of machinery and equipment, and future rental costs under a noncancellable operating lease. In July 1996, the Company adjusted the carrying value of all remaining assets to be disposed to their net realizable value. The total loss incurred on the shut down of the Springfield operations of $4,236 is included on the consolidated statement of operations in the write-off of goodwill and obsolete assets/facilities. At July 31, 1997 and 1996, the Company has accrued $1,397 and $2,387, respectively, relating to the closure of this facility. The reserve is included in accrued plant closing and disposal costs. The reserve at July 31, 1997 was predominantly related to the remaining lease liability, which was settled subsequent to July 31, 1997. The Company holds assets from the facility with a net realizable value of $1,910, which are to be transferred to the new West Virginia facility in fiscal 1998. In September 1994, the Company sold 40% of the capital stock of Multiple Container Recycler, Inc. ("MCR") to a company owned by the son of a director and officer of the Company. The sale price was $1,000. The Company received a note for a total of $1,000 plus accrued interest payable in twelve equal principal installments beginning October 1995, with a subsequent agreement extending the due date six months until April 1996 (see below). All acquired shares in MCR and 175,000 shares of previously acquired PureTec common stock (which had a value approximating the note as of the date of sale) have been pledged as collateral against the loan. The Company recognized a gain of $1,000 on this transaction. In fiscal year 1997, the Company agreed to transfer the net assets of MCR to its minority owners. Under the terms of the agreement, the operations, and all existing assets were transferred effective September 1, 1996. The existing liabilities as of that date were retained by the Company. Liabilities remaining at July 31, 1997 were approximately $100. Upon consummation of the agreement, 333,333 shares of PureTec stock were transferred to the Company in satisfaction of the $1,000 note. The Company incurred a loss of $312 in conjunction with this transaction, which was provided for in the prior year. The above amounts include management's best estimates of the net realizable value of certain fixed assets to be retained by the Company and estimated expenditures to be incurred. The ultimate amounts could differ materially in the near term from the amounts assumed in arriving at the loss on the shut down of these facilities. F-18 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 10. ACCRUED EXPENSES July 31, July 31, 1997 1996 -------- --------- Salaries and wages $ 4,519 $ 6,714 Accrued interest 3,569 3,317 Accrued expenses related to discontinued operations 656 566 Other(a) 17,065 14,350 --------- --------- $ 25,809 $ 24,947 ========= ========= (a) Included in other in 1997 and 1996 is a $3,000 disputed note payable which arose in connection with Ozite's acquisition of Dalen Trading Co. ("Dalen") in 1987. The note payable and related accrued interest alleged to be due to Dalen's previous owner were in dispute and the subject of litigation since 1987. Subsequent to July 31, 1997, this litigation was settled (See Note 20(b)). 11. LONG-TERM DEBT July 31, July 31, 1997 1996 -------- -------- 11-1/4% Senior Secured Notes due December 1, 2003 (a) (discounted at an estimated effective interest rate of 12.7%) $118,248 $117,017 7% Subordinated Notes (principal amount of $3,750) issued in connection with the acquisition of Ozite (discounted at an estimated effective interest rate of 16%) (See Note 1)(b) 1,860 1,606 7-1/10% Foreign Term Loan payable in Belgian Francs, with quarterly interest payments, eight semi-annual principal payments of approximately $550 and a balloon payment of $693 due on January 31, 1997. The loan is secured by a pledge of working capital and a lien on certain fixed assets of the Company's foreign operations --- 693 Mortgage payable, bearing interest at prime plus 11/2%, payable in monthly installments of $4, plus interest with a balloon payment of $322 due in January, 2000 329 372 Equipment financing loans and other notes payable in monthly installments through October 1998 at interest ranging from 10.4% to 11.1% 198 256 5.25% Direct Loan Promissory Note, payable in 24 equal monthly installments of interest only commencing March 1996; and thereafter payable by 12 equal monthly installments of $10 plus interest, commencing March 1998 through February 1999 251 347 Term loan(f) --- 2,692 Equipment financing loans and other notes payable in monthly installments through 1997 at interest rates ranging from 6-3/4% to 16% --- 676 6.10% Foreign Term Loan payable in Belgium Francs, with interest in twenty quarterly installments from June 1996 through March 2001 822 1,263 3.75% Foreign Term Loan payable in Belgium Francs, with five equal yearly installments with first payment commencing December 1997 791 --- 9.93% Foreign Term Loan payable in Italian Lira --- 956 F-19 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 9.78% Foreign Term Loan payable in Italian Lira --- 1,090 8.40% Foreign Term Loan payable in Italian Lira, repayable semi-annually including principal and interest through 2001 1,295 --- 5.30% Foreign Term Loan payable in Italian Lira, with five equal yearly installments with first payment commencing May 1998. Interest is payable quarterly 1,065 --- Foreign Term Loan payable in British Pounds, in 13 equal semi-annual installments of $151, commencing June 1998, with a final payment due December 2004 at 1.75% plus LIBOR(approximately 7.75% at July 31, 1997)(c) 2,302 --- Capitalized Lease Obligation, 20 years, commencing February 1997 3,841 --- Bank financing(d) 3,341 4,911 Occidental Chemical Corporation(e) 2,524 4,000 -------- -------- 136,867 135,879 Less: current portion 7,363 5,292 -------- -------- $129,504 $130,587 ======== ======== As described below, substantially all assets of the Company are pledged as security under outstanding debt agreements. a. In November 1993, PST issued $125,000 principal amount of Senior Secured Notes due 2003 (the "Senior Secured Notes"). Interest payments on the Senior Secured Notes, at a rate of 11-1/4% are payable semiannually and commenced June 1, 1994. For the years ended July 31, 1997 and 1996, the Company recorded $1,231 and $1,095, respectively, in interest expense relating to the accretion of these notes. The Senior Secured Notes are senior secured obligations of PST, ranking pari passu in right of payment with all existing and future senior indebtedness of PST and senior to all subordinated indebtedness of PST, if any. The Senior Secured Notes are secured by substantially all real property, machinery, equipment, general intangibles and other intellectual property now owned or hereafter acquired by PST and by a pledge of all outstanding capital stock of Plastic Specialties and Technologies Investments, Inc. a wholly-owned subsidiary of PST. The indenture for the Senior Secured Notes contains covenants which restrict, among other matters, the ability of PST and its subsidiaries to incur additional indebtedness, pay dividends (except as described in the indenture), redeem capital stock, prepay subordinated indebtedness, create liens, dispose of certain assets, engage in sale and merger transactions, make contributions, loans or advances and enter into transactions with affiliates. At July 31, 1997, PST is unable to pay dividends. b. For the years ended July 31, 1997 and 1996, the Company recorded $254 and $487, respectively, in interest expense relating to the accretion of these notes. c. The Agreement with the UK Commercial Bank is payable in 13 equal semi-annual installments of $151 commencing June 20, 1998 with a final payment of $158 on December 31, 2004. d. The Term Loan Agreement with a Commercial Bank that Burlington has entered into contains a $5,500 term loan payable in 28 quarterly installments of approximately $196 plus interest accrued at the prime rate plus 1.25 % commencing October 31, 1995. In addition, the Company is required to make yearly mandatory cash flow prepayments, as defined in the Agreement. The loan is secured by the property, plant, and equipment acquired from OxyChem. As described in Note 8(b), Burlington is not in compliance with certain covenants of the Agreement for which it has obtained a waiver. Additionally, as the Company intends to repay the borrowings outstanding under the Agreement during 1998, the entire amount has been classified in current portion of long-term debt at July 31, 1997. F-20 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) e. As described in Note 1, this amount represents the renegotiated Seller Financing, arising from the purchase of Burlington from OxyChem. This loan was repaid subsequent to July 31, 1997 and as such has been classified as a current liability. f. In February 1996, Styrex and Pure Tech Plastics, Inc. and subsidiaries ("PTP") entered into a Loan and Security Agreement with a bank ("Styrex/PTP Loan") providing an aggregate revolving credit line of $7,500 and an aggregate term loan of $5,000. The proceeds of the loan were used to pay off existing debt. As of July 31, 1996, there was $3,839 outstanding under the revolving credit line, and $2,692 under the term loan. In September 1996, the Company repaid the amount outstanding at that time relating to PTP. Styrex subsequently paid off its loans to the bank on November 11, 1996 when it signed a new Loan and Security Agreement (the "Styrex Loan Agreement") with a Finance Company for a period of three years. The Styrex Loan Agreement provides for a term loan and revolving loans up to a maximum of $6,000 and letters of credit of up to $1,000 and is secured by all of the assets of Styrex. Advances under the agreement bear interest at the rate of prime plus 1 1/2%. The initial term loan of $1,360 has scheduled repayments of $23 per month beginning December 1, 1996. As of July 31, 1997 and 1996 the revolving loan and the term loan balances were $1,086 and $1,156, respectively. The operations of Styrex were sold in August 1997. Accordingly, these amounts are included in net assets held for sale in the consolidated balance sheet which is included in other current assets. Maturities of long-term debt are as follows: Years Ending July 31, ----------------- 1998 $ 7,363 1999 1,626 2000 1,446 2001 1,308 2002 646 Thereafter 124,478 -------- $136,867 ======== 12. INCOME TAXES The provision for income taxes from continuing operations consists of the following: Year Ended ------------------------------------------- July 31, 1997 July 31, 1996 July 31, 1995 ------------- ------------- ------------- Current Tax Provision Federal $ --- $ --- $ --- Foreign 2,804 2,269 --- State 150 288 --- ------- ------- ------- 2,954 2,557 --- ------- ------- Deferred Tax Provision (Benefit) Federal --- --- --- Foreign 177 80 --- State --- --- --- ------- ------- ------- 177 80 --- ------- ------- ------- Total $ 3,131 $ 2,637 $ --- ======= ======= ======= F-21 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) The Company's tax provision for the year ended July 31, 1997 and 1996 are primarily due to the Company's foreign operations. The Company's tax benefit for the year ended July 31, 1995 reflects the reduction in previously recorded temporary differences. The tax provision does not reflect the expected 34% benefit based on existing federal tax rates due to the sizable operating losses experienced in its domestic operations. The Company has not anticipated the tax benefits of such losses as it is more likely than not that such deferred tax asset would not be realizable at this time. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, net of operating losses and income tax credit carryforwards. The income tax effects of significant items comprising the Company's net deferred tax liability are as follows:
July 31, 1997 July 31, 1996 --------------------------- ---------------------------- Current Non-current Current Non-current ------- ----------- ------- ----------- Assets Net operating loss carry forward $ -- $ 27,200 $ -- $ 31,363 Expenses currently not deductible 3,308 1,518 2,044 -- Allowance for doubtful accounts 235 -- 200 -- Capitalization of inventory costs 556 -- 421 -- Employee benefits liabilities -- 1,956 -- 2,218 Pension -- 638 -- 570 Liabilities Difference between book and tax basis of property and equipment -- (10,186) -- (11,531) Discount -- (2,701) -- (3,193) -------- --------- -------- --------- Net deferred tax asset $ 4,099 18,425 2,665 19,427 Less valuation allowance (4,099) (19,882) (2,665) (20,707) -------- --------- -------- --------- Net deferred income taxes $ -- $ (1,457) $ -- $ (1,280) ========== ========= ========= ==========
The net deferred tax asset has been subject to a valuation allowance except for the net deferred tax liability as of July 31, 1997 and 1996 of $1,457 and $1,280 which relates to income taxes in foreign jurisdictions which can not be offset against U.S. income taxes. The valuation allowance has changed in the current year due to revisions of previously estimated amounts, changes in the deferred tax amounts and additions to the net operating losses, which are fully reserved. The domestic net operating losses are subject to matters discussed below and are subject to change due to the restructuring occurring at the corporate subsidiary level, as well as adjustment for the timing of inclusion of expenses and losses in the federal returns as compared to amounts included for financial statement purposes. Net Operating Losses The Company and its U.S. subsidiaries will file a consolidated tax return for the year ended July 31, 1997. The net operating loss ("NOL") carryforwards involve complex issues of federal tax law and are subject to various limitations as follows: $55,200 Subject to IRC Section 382 annual limitation of approximately $3,900; this includes $4,700 of losses incurred prior to 1992 which are subject to additional limitations. Approximately $26,000 of these losses were incurred after the IRC Section 382 change of ownership occurred and are not subject to F-22 Section 382 limitations; expire 2001-2010. $20,800 Subject to IRC Section 382 annual limitation of approximately $3,100, Separate Return Limitation Year ("SRLY") as to Ozite Corporation; expire 1997-2005. $ 4,000 Subject to IRC Section 382 annual limitation of approximately $3,100. (This is part of, and not in addition to $3,100 IRC Section 382 limitation discussed immediately above). SRLY as to Ozite and Subs.; expires 2009. To the extent the Ozite amounts of NOL's are subsequently recognized, they will cause changes in the goodwill arising from the transaction. In addition to the domestic NOL balances, the Company has incurred losses relating to CEL, a subsidiary of the Company, taxable in Northern Ireland. Fiscal 1997 losses aggregated $1,430 which have no expiration date. The Company believes that it is more likely than not that this deferred tax asset will not be realized and has recorded a full valuation allowance on these amounts. Such temporary differences do not include deferred United States income taxes on undistributed earnings of approximately $25,833 of Ozite's foreign subsidiaries as the Company has the ability and intent to permanently reinvest such earnings. See Note 20(b) for a discussion of Ozite's Belgian subsidiary income tax assessment. 13. STOCKHOLDERS' EQUITY a. Capitalization The Company's authorized capital consists of 50,000,000 shares of common stock, $.01 par value and 1,000,000 shares of preferred stock, $.01 value. The holders of the Company's common stock are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders. The holders of the Company's common stock have no cumulative voting rights in the election of directors. Subject to the prior rights of the holders of the Company's preferred stock, all holders of common stock are entitled to share equally in dividends from sources available therefore when, as and if declared by the Board of Directors, and upon liquidation or dissolution of the Company, whether voluntary or involuntary, to share equally in the assets of the Company available for distribution to stockholders. Stockholders have no preemptive rights. There is no cumulative voting, redemption right or right of conversion in existence with respect to the common stock. All outstanding shares issued are fully paid and non-assessable and legally issued. The Board of Directors is authorized to issue additional common stock within the limits authorized by the Company's charter and without stockholder action. The authorized shares of preferred stock, $.01 par value, are issuable at any time and from time to time, by action of the Board of Directors without further authorization from the stockholders, except as otherwise required by applicable law or regulations, to such persons and for such consideration (but not less than the par value thereof) as the Board of Directors determines. The Board of Directors can fix the exact terms of each series of preferred stock, including number of shares, designation, preferences, privileges, restriction and rights with respect to dividends, conversion, voting, redemption and other matters, at or before the time such series is to be sold or issued based upon factors such as market conditions and negotiations with respective purchasers existing at that time. There were 5,000 shares of preferred stock to be issued which were considered outstanding at July 31, 1995 in connection with the Ozite Merger. Such shares were issued in fiscal 1996. F-23 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) Effective as of July 31, 1996, the holders of the then outstanding redeemable preferred stock entered into an agreement with the Company to convert such shares into 1,606,688 shares of common stock of the Company (the "Exchange Agreement"). The exchange rate of this conversion was 321.3368 shares of common stock for each preferred share, with fractional shares rounded up to the next whole share. Of the total shares issued, 50%, or 803,344, were delivered to the holders of the Preferred Stock and are restricted from sale until October 1, 2001 (the "Exchange Shares"). The remaining 50% were delivered to an escrow agent pending release as described below (the "Escrow Shares"). Under the terms of the Exchange Agreement, Escrow Shares will be released back to the Company if such specified litigation is settled prior to July 31, 2001 in excess of amounts defined in the Exchange Agreement. The shares released to the Company will be based on an exchange price of $3.2016 per share or the then market price of the common stock, whichever is greater. If the incremental cost to the Company exceeds the released value of the Escrow Shares, the Company will obtain Exchange Shares, valued as indicated above, for the cost of the settlement in excess of the released value of the Escrow Shares. Escrow Shares not released to the Company as indicated above by July 31, 2001, will then be released to the holders of the Preferred Stock. The Exchange and Escrow Shares must be registered within 180 days of the settlement of the specified litigation or July 31, 2001, whichever occurs first. In addition, pursuant to the terms of the Company's 7% Subordinated Notes (see Note 11), the Company also has the ability to offset principal payments due on these Subordinated Notes against any excess cost of settlement in the litigation referred to above. See further discussion at Note 20(b). The Exchange Shares have been valued by the Company at the date of conversion at the five day trailing market price of the Company's common stock. The Escrow Shares have been valued based on such price, less a liquidity discount due to the nature of such shares. The total value of the Exchange and Escrow Shares approximated the value of the Preferred Stock on the date of conversion, July 31, 1996. Therefore, the above transaction has had no effect on the net equity position of the Company. b. Stock Issuances (i) Private Placements Common Stock: During the period from October 1994 to July 1995, the Company issued an aggregate of 3,332,737 shares of common stock under three private placements made entirely to foreign persons and companies under Regulation S of the Securities Act of 1933. Net proceeds from these placements aggregated $13,160 before expenses. In January 1996, the Company made a private placement of 250,000 shares of common stock for proceeds of $500. In March 1996, the Company made an additional private placement of 250,000 shares of common stock for proceeds of $500. In both cases, the proceeds were used to reduce outstanding debt. As described in Note 1, on June 27, 1997, PureTec completed a private placement through Ozite, of 2,235,030 shares of its common stock, in exchange for 1,117,515 shares, or an additional 13.4%, of PST common stock outstanding. Convertible Debentures: During the period from February 1995 to June 1995, the Company received $8,371 and, in exchange, issued Convertible Debentures in the same amount. The debentures matured at various times from December 1, 1995 to February 1996 and bore interest at 3% per annum. The holders of the debentures were entitled, at their option, at any time F-24 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) after a three-month holding period, to convert the principal amount, or any portion of the debenture, into shares of common stock of the Company at 80% of the market price of the Company's common stock. As of July 31, 1995, debentures in the amount of $7,371 were converted into 1,714,780 shares of the Company's common stock. In August 1995, the remaining $1,000 was converted into 227,273 shares of common stock. (ii) Other Issuances In March 1995, the Company acquired an additional interest in Evolutions for 350,000 shares of common stock. The issued shares are accounted for by the Company as Treasury stock. During 1996, Evolutions sold 202,500 shares of the Company's common stock, resulting in an increase to paid-in capital of $487. The Company issued 113,890 shares of Common Stock as the result of a settlement of a lawsuit in October 1995. The value of the shares approximated $438 at such date and has been charged to expense in 1995. During fiscal 1997, 333,333 shares of common stock were transferred to the Company in settlement of a $1,000 note in conjunction with the transfer of the MCR Vending operations to its minority owners. c. Stock Option Plans As part of the Merger, the Company has adopted a stock option plan (the "1995 Plan") covering 5,000,000 shares of the Company's common stock, par value $.01, pursuant to which officers, directors, employees and consultants are eligible to receive options. The options issued under this plan may be ISOs or non-statutory options. No options may be granted after December 31, 2002. Each option granted under the 1995 Plan may be exercised for a period of not more than ten years after the date of grant, or until the expiration of the plan, whichever occurs first. The option price must not be less than fair market value for ISOs and 85% of fair market value for non-statutory options. In total, options to acquire 1,068,366 shares of Company common stock have been transferred from previously existing Pure Tech plans to the 1995 Plan at exercise prices ranging from $2.03 to $6.88 per share. In March 1995, the Company reclassified options to acquire 154,571 shares of common stock as "plan" options. These options have exercise prices ranging from $2.03 to $7.50. In fiscal 1996, the Company issued 1,236,500 plan options at an exercise price of $3.00 per share and 300,000 plan options with an exercise price of $4.25. In fiscal 1997, the Company issued 840,000 plan options at an exercise price of $2.25 per share. The following summarizes transactions under the employee stock option plan for the years ended July 31, 1997, 1996, and 1995. F-25 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) Number of Shares Weighted Average Exercise Price ---------------- ---------------- Outstanding, June 30, 1994 710,404 $ 5.83 Granted 427,000 5.97 Reclassified 154,571 5.83 Exercised and canceled (223,609) 5.83 ---------- ------ Outstanding, July 31, 1995 1,068,366 3.62 Granted 1,536,500 3.24 Canceled (20,000) 6.57 ---------- ------ Outstanding, July 31, 1996 2,584,866 3.32 Granted 840,000 2.25 Canceled (256,500) 3.49 ---------- ------ Outstanding, July 31, 1997 3,168,366 $ 3.03 ========== ====== At July 31, 1997 and 1996, approximately 1,372,000 and 923,000 options, respectively, were vested and exercisable at weighted-average prices of $3.11 and $3.62, respectively. The Company applies APB Opinion 25 and related Interpretations in accounting for its stock plans. Accordingly, no compensation cost has been recognized for stock option grants issued under any of the Company's stock option plans. Had compensation cost for stock option grants issued during 1997 and 1996 been determined under the provisions of SFAS No. 123, the Company's net loss and loss per share would have been $3,475 and $.12 in 1997 and $9,741 and $.36 in 1996. The pro forma effect on net loss and net loss per share in 1996 incudes the effect of modifying the terms of approximately 771,000 options that were granted prior to July 31, 1995. In November 1996, all options outstanding at the beginning of the year with an exercise price of $7.50 or greater were modified to reduce the exercise price to $3 or $4.25 per share. The pro forma effect on net loss and loss per share for 1997 and 1996 is not representative of the pro forma effect on net income in future years, because it does not take into consideration pro forma compensation expense related to all other grants made prior to 1996. The fair value of each stock option granted in 1997 and 1996 under the Company's plans was estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted-average assumptions were used to value grants issued under the plans in 1997 and 1996: F-26 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 1997 1996 ---- ---- Dividend yield N/A N/A Volatility 37.00% 34.36% Risk-free interest rate 6.00% 6.00% Expected term of options (in years) 8.30 9.80 The weighted-average fair values per share of stock options granted during 1997 and 1996 were $1.29 and $.91, respectively. The exercise price ranges and average remaining lives for options outstanding and exercisable at July 31, 1997 were: Range of Number of Weighted Average Number of Weighted- Exercise Shares Remaining Exercise Shares Average Prices Outstanding Life (in Price Exercisable Exercise at 7/31/97 Yrs.) Price - --------- ------------ ---------- --------- ----------- --------- 2.03 - 3.00 2,749,700 7.90 $2.74 1,020,322 $2.96 3.44 - 6.88 418,666 8.00 4.88 351,966 4.88 --------- ---- ----- --------- ----- Total: 3,168,366 7.91 $3.03 1,372,288 $3.11 ========= ==== ===== ========= ===== d. Stock Warrants/Options The following options and warrants were issued to non-employees of the Company: In August 1994, the Company issued non-plan options to acquire 100,000 shares of common stock. These options have an exercise price of $6.88. In January 1995, the Company issued non-plan options to acquire 685,000 shares of common stock. These options have exercise prices ranging between $5.50 and $5.62. In March 1995, the Company reclassified non-plan options to acquire 154,571 shares of common stock. These options have exercise prices ranging from $2.03 to $7.50. The above transactions did not result in any compensation cost or expenses, as the exercise prices equaled or exceeded the fair market value of the stock. In the case of the reclassified options, the exercise price at the time of original issue equaled or exceeded the fair market value of the stock. In December 1994, the Company entered into a settlement of certain litigation which provides for the issuance of 450,000 warrants to acquire the Company's common stock at an exercise price of $4.61 per share (See Note 20 (b)). F-27 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) The following table summarizes the status of stock options and warrants issued to non-employees of the Company: Options/ Number Warrant of Shares Prices --------- -------- Outstanding, June 30, 1994 521,000 $ 2.03-$ 22.00 Granted 1,235,000 4.64- 6.88 Reclassified (154,571) 2.03- 7.50 Exercised and canceled (32,985) 7.50 ---------- Outstanding, July 31, 1995 1,568,444 2.03- 22.00 Canceled (200,000) 5.50 ---------- Outstanding, July 31, 1996 1,368,444 4.25- 22.00 Exercised (122) 4.61 Canceled (56,000) 4.25 ---------- Outstanding, July 31, 1997 1,312,322 4.25- 22.00 ========== At July 31, 1997, all of the stock options/warrants issued to non-employees of the Company were exercisable, and expired at various dates during fiscal 1998 and 1999. 14. RETIREMENT PLANS (a) PST Pension Plan: PST maintains a noncontributory defined benefit pension plan. The plan covers substantially all employees of PST and substantially all salaried employees of Burlington who are not covered by a collective bargaining agreement, who have completed one year of service and are not participants in any other pension plan. The funding policy of the Company is to make contributions to the plan based on actuarial computations of the minimum required contribution for the plan year. The plan's assets are invested primarily in the Master Trust Fund of PST in accordance with the investment agreements of the plan. Net pension costs consist of the following: Year Ended July 31, July 31, 1997 1996 ---- ---- Service cost $ 667 $ 647 Interest cost on projected benefit obligation 589 542 Actual return on plan assets (1,854) (557) Net amortization and deferrals 1,287 88 -------- ------ $689 $ 720 ======== ====== F-28 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) The funded status of the Plan is as follows: July 31, July 31, 1997 1996 --------- -------- Vested benefit obligation $ (6,548) $ (5,831) ========= ========= Accumulated benefit obligation $ (6,843) $ (6,089) ========= ========= Projected benefit obligation $ (8,540) $ (7,807) Plan assets at fair value 8,339 6,029 --------- --------- Projected benefit obligation in excess of plan assets (201) (1,778) Unrecognized net gains (1,946) (415) Less unrecognized actuarial gains and losses and prior service costs attributable to minority interest in PST (15) 295 --------- --------- Accrued pension obligation $ (2,162) $ (1,898) ========= ========= The expected long-term rate of return on plan assets of the plan was 9% for all periods presented and the discount rate was 8% at July 31, 1997 and 1996. (b) Burlington Hourly Pension Plan: Burlington has a noncontributory defined benefit pension plan that covers substantially all hourly compensated employees covered by a collective bargaining agreement, who have completed one year of service. The funding policy of the Company is to make contributions to this plan based on actuarial computations of the minimum required contribution for the plan year. The plan's assets are invested primarily in the Master Trust Fund of PST. Net pension costs consist of the following: Year Ended ----------------------------- July 31, 1997 July 31, 1996 ------------- ------------- Service cost $ 110 $ 108 Interest cost on projected benefit obligation 309 278 Actual return on plan assets (780) (165) Net amortization and deferrals 487 (104) -------- -------- $ 126 $ 117 ======== ======== July 31, 1997 July 31, 1996 ------------- ------------- Vested benefit obligation $(4,103) $(3,682) ======== ======== Accumulated benefit obligation $(4,503) $(3,888) ======== ======== Projected benefit obligation $(4,503) $(3,888) Plan assets at fair value 4,169 3,222 -------- -------- Projected benefit obligation in excess of plan assets (334) (666) Unrecognized net loss (gain) (262) 180 Adjustment to recognize minimum required liability -- (180) Unrecognized prior service cost 238 -- -------- -------- Accrued pension costs $ (358) $ (666) ======== ======== F-29 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) The expected long-term rate of return on plan assets was 9% for the period and the discount rate was 8% for the year ended July 31, 1997. In July 1997, the Plan was amended due to an agreement reached with the labor union representing the majority of hourly workers at Burlington. This agreement increased retirement benefits from $25, multiplied by the number of years of benefit service, to $26, effective June 1998, and $27, effective June 2000. These changes are reflected in the year-end disclosure information above, with the increase in liability established as a prior service cost. (c) Postretirement Liabilities -------------------------- In addition to providing pension benefits, the company also sponsors the Burlington Retiree Welfare Plan, which provides certain health care benefits for retired employees who were employed on an hourly basis and covered under a collective bargaining agreement. Employees and their families become eligible for these benefits after the employee completes five years of service, if retiring at age fifty-five, or at age sixty-five, the normal retirement age. Post retirement health care benefits paid during the year ended July 31, 1997 and 1996 amounted to $139 and $110, respectively. Effective June 23, 1997, the plan was amended to provide a zero-premium Medicare risk HMO coverage for all future post-age-65 retirees, as well as many of the Company's current retirees. This amendment to the plan was accounted for as a negative plan amendment pursuant to Statement of Financial Accounting Standards No. 106. The resulting reduction in the accrued postretirement liability of $3,200 will be recognized and amortized as a reduction of net periodic post retirement benefit cost over the next eight years at the rate of $400 per year. The amortization period represents the average period of time over which an under-55 employee attains full eligibility for this post retirement benefit. Net periodic postretirement benefit cost for 1997 was $553 and was comprised of $133 of service cost and $420 of interest cost. Net periodic postretirement benefit cost for 1996 was $513 and was comprised of $123 of service cost and $390 of interest cost. The funded status of the plan is as follows: July 31, 1997 July 31, 1996 ------------- ------------- Accumulated postretirement benefit obligation Retirees $(1,099) $(1,511) Fully eligible active plan participants (408) (2,138) Other active participants (310) (1,672) ------- ------- Total (1,817) (5,321) Unrecognized net gain (737) (19) ------- ------- Sub-total (2,554) (5,340) Unrecognized prior service cost relating to negative plan amendment (see above) (3,200) - ------- ------- Accrued Post retirement costs $(5,754) $(5,340) ======= =======
The accumulated postretirement benefit obligation was determined using an 8% discount rate for the years ended July 31, 1997 and 1996. The health care cost trend rate for medical benefits was assumed to be 8% for 1996, gradually declining until it reaches a constant annual rate of 5% in 2002. The health care cost trend rate assumption has a significant effect on the amounts reported. A 1% increase in health care trend rate would increase the accumulated Post retirement benefit obligation by $943 and increase the service and interest components by $100 at July 31, 1997. F-30 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (d) Savings Plans ------------- Additionally, PST has a savings plan for all non-collective bargaining employees whereby PST will match each employee's contribution up to 2% of the employee's earnings. The savings plan is also made available to PST affiliates who bear their respective costs. Such contribution amounted to approximately $492 and $505 for the year ended July 31, 1997 and 1996, respectively. Burlington employees who are covered under a collective bargaining agreement participate in the Pure Tech International, Inc. Savings and Investment Plan for Hourly Employees at Burlington, New Jersey. The Company will match each employee's contribution up to 50% of the contributions not in excess of 6% of the employee's compensation. Such contribution amounted to approximately $73 and $96 for the year ended July 31, 1997 and 1996, respectively. 15. SEGMENT INFORMATION The Company operates in three industry segments: plastic products, plastic materials and recycling. The plastic products segment principally produces lawn and garden hose, medical tubing and specialty tubing and gaskets. The plastics materials segment principally produces recycled and general purpose plastics and medical grade vinyl compounds. The recycling segment consists of the operating of material recovery facilities and the recycling of plastics and some aluminum. The plastic products segment has operations in the United States, Europe and Canada (Canadian operations commencing in 1996, which are included in the domestic amounts below). The plastic materials and recycling segments operate principally in the United States. Financial information concerning the Company's business segments and the geographic areas in which it operates is as follows: Year ended ----------------------------------------------------------------------- July 31, 1997 July 31, 1996 July 31, 1995 ------------- ------------- ------------- Net Sales: Plastic Products: Domestic $149,083 $152,352 $ - Europe 35,300 34,158 - Plastic Material 154,064 142,314 - Recycling 18,681 34,248 30,189 Corporate & elimination (41,794) (36,728) - --------- --------- --------- Total Net Sales $315,334 $326,344 $ 30,189 ========= ========= ========= Operating Income (Loss): Plastic Products: Domestic $ 21,822 $ 19,366 $ - Europe 8,276 6,375 - Plastic Material 6,533 5,907 - Recycling (197) (5,088) 1,020 Corporate & elimination (9,817) (5,692) (7,304) --------- --------- ---------- Total Operating Income (Loss) $ 26,617 $ 20,868 $ (6,284) ========= ========= ==========
F-31 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) Depreciation and Amortization: Plastic Products: Domestic $ 4,998 $ 4,622 $ - Europe 1,641 1,496 - Plastic Material 3,123 3,589 - Recycling 1,101 1,263 2,473 Corporate & elimination 2,917 2,457 388 -------- -------- -------- Total Depreciation & Amortization $ 13,780 $ 13,427 $ 2,861 ======== ======== ======== Capital Expenditures: Plastic Products: Domestic $ 2,553 $ 2,440 $ - Europe 1,852 3,804 - Plastic Material 9,502 1,726 - Recycling 717 916 2,727 Corporate and discontinued operations 451 1,623 216 -------- -------- -------- Total Capital Expenditures $ 15,075 $ 10,509 $ 2,943 ======== ======== ======== Identifiable Assets: Plastic Products: Domestic $145,150 $135,095 $134,147 Europe 36,760 37,907 36,667 Plastic Material 103,998 85,900 73,708 Recycling 10,186 19,520 27,998 Corporate and discontinued operations 15,729 18,268 17,601 --------- --------- --------- Total Identifiable Assets $311,823 $296,690 $290,121 ========= ========= =========
Operating income (loss) is total sales less cost of goods sold and operating expenses of each segment before deductions for general corporate expenses not directly related to an individual segment. In computing operating income (loss), none of the following items have been added or deducted: interest expense, income taxes (benefit) and loss from discontinued operations. Identifiable assets by industry are those assets that are used in the Company's operation in each industry segment, including assigned value of goodwill. Corporate identifiable assets consist primarily of cash, prepaid expenses, fixed assets and deferred debt costs offset by the elimination of intersegment profit in ending inventories. 16. FOURTH QUARTER ADJUSTMENTS During the fourth quarter of 1997, the Company recorded certain adjustments aggregating. $1,200. The Company recorded additional inventory of approximately $1,800 based on the results of a book to physical reconciliation. Additionally, the Company recorded a charge of approximately $600 as the result of reconciling intercompany accounts. It cannot be specifically determined to which quarters in the year these amounts relate. Additionally, during the fourth quarter of 1997, the Company recorded certain adjustments aggregating $3,158. These adjustments relate to the write-off of licenses and a supply agreement ($920), the reversal of a portion of the Dalen litigation reserve ($2,000), the recording of the Circuit Chemistry settlement ($1,988), and the loss on disposal of Styrex ($2,250). F-32 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) During the fourth quarter of 1996, the Company recorded certain adjustments aggregating approximately $7,194. These adjustments related to the shut down of the Springfield location ($4,236), losses recorded in connection with equity investments ($1,188), the final exit of the Ozite Mfg. location ($570) and the decision to dispose of the MCR operations ($400). In addition to the above, certain adjustments were recorded at Burlington in the fourth quarter ($800) that related to operations throughout the year. It cannot be specifically determined what quarters in the year these amounts relate to. During the fourth quarter of 1995, the Company recorded certain adjustments aggregating approximately $11,110. These adjustments were related to the write-off of obsolete equipment ($4,617) and the write-off of intangibles ($6,493). The write-off of intangibles included $3,707 related to Styrex. 17. DISCONTINUED OPERATIONS: The following table summarizes the loss from operations and disposal of discontinued operations of the Company for the years ended July 31, 1997, 1996 and 1995: 1997 1996 1995 ---- ---- ---- Glass operations (a) Loss from discontinued operations $ -- $ -- $ -- Loss on disposal from discontinued operations -- -- (4,809) ------- ------- ------- -- -- (4,809) ======= ======= ======= Ozite Manufacturing (b) Loss from discontinued operations -- (979) -- Loss on disposal from discontinued operations (672) (2,241) -- ------- ------- ------- (672) (3,220) -- ======= ======= ======= Injection molding operations (Styrex) (c) Loss from discontinued operations (1,226) (546) (4,580) Loss on disposal from discontinued operations (2,250) -- -- ------- ------- ------- (3,476) (546) (4,580) ======= ======= ======= Circuit Chemistry (d) Loss from discontinued operations -- -- -- Loss on disposal from discontinued operations (1,988) -- -- ------- ------- ------- (1,988) -- -- ======= ======= ======= Dalen (e) Loss from discontinued operations -- -- -- Gain on disposal from discontinued operations 2,000 -- -- ------- ------- ------- 2,000 -- -- ======= ======= ======= Total discontinued operations Loss from discontinued operations (1,226) (1,525) (4,580) Loss on disposal from discontinued operations (2,910) (2,241) (4,809) ------- ------- ------- $(4,136) $(3,766) $(9,389) ======= ======= ======= F-33 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) a) Glass operations During 1994 and 1995, the Company discontinued and arranged for the disposal of its various glass, metal, and material recovery facility ("MRF") operations. In April 1995, the Company leased its Newark, New Jersey glass processing and MRF facilities to Automated Recycling Technologies, Inc. ("ARTS") for an initial period of two years. At the conclusion of the initial two-year period, ARTS had the right, to extend at its option, the lease agreement for eight consecutive one-year periods. ARTS exercised that right and extended the lease at the Newark glass processing operation, while vacating the MRF facility. The Company has accrued $1,216 and $1,660 for various liabilities related to these operations at July 31, 1997 and 1996, respectively. These reserves are included in accrued plant closing and disposal costs in current liabilities and long-term debt. These liabilities relate primarily to rent, clean-up costs, and mortgage and equipment financing loans. b) Ozite Manufacturing On December 21, 1995, PST entered into an Asset Purchase Agreement with Foss Manufacturing Company, Inc. ("Foss") for the sale of certain assets of PST's Ozite Manufacturing Division ("Ozite Mfg.") in Libertyville, Illinois to Foss as of January 31, 1996. Under the terms of this agreement, Foss purchased Ozite Mfg.'s accounts receivable and inventory, net of reserves, as well as certain prepaid expenses, trade names, trademarks, and patents for approximately $3,025, which was received by PST on February 12, 1996. Furthermore, the agreement provided for the company to receive a minimum of $450 for all of its machinery and equipment at the facility. During the fourth quarter of fiscal 1996, adjustments were made to increase by $570 the estimated loss on disposal recorded in the second quarter due to the final shut down of these facilities. Accordingly, the Ozite Mfg. operations have been reflected as discontinued operations in the statement of operations for all periods presented. Net sales generated from these operations amounted to $4,882 and $11,714 for the years ended July 31, 1996 and 1995, respectively. During fiscal 1997, the Company settled certain litigation related to Ozite Mfg. (see Note 20(b)). These settlements resulted in charges of $672. Certain litigation remains ongoing, however management believes any potential exposure to the Company is covered by insurance. c) Styrex Styrex Industries, Inc. ("Styrex") was a wholly owned subsidiary of the Company engaged in thermoplastic and injection molding operations. In August 1997, the operations of Styrex were sold. In connection therewith, the Company recorded a loss on disposal of $2,250. Accordingly, operating results for Styrex have been shown as a discontinued operation within the consolidated statement of operations for the years 1997, 1996 and 1995. Net sales for this operation were $14,767, $17,979 and $21,713 for the years ended July 31, 1997, 1996 and 1995, respectively. The net loss for this operation of $1,226 for this operation for fiscal 1997 was also included within discontinued operations. In addition, the net assets for Styrex of $270 have been included in other current assets on the consolidated balance sheet at July 31, 1997. The measurement date for this discontinued operation is April 30, 1997. In August 1997, the operations of Styrex were sold for cash. The Company has accrued $656 for various liabilities related to the closing of this operation, which are included in accrued expenses. d) Relates to K&B Liquidating Corp. Lawsuit (see Note 20). e) Relates to reduction of accrued expenses for Dalen lawsuit (see Note 20). 18. SUBSEQUENT EVENTS In August 1997, the operations of Styrex were sold and the operating results of Styrex for fiscal 1997 were included within discontinued operations (see Note 17). Accordingly, results for fiscal 1996 and 1995 were also reclassed to discontinued operations. F-34 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) In September 1997, Burlington Resins, Inc. settled a lawsuit it had filed against OxyChem. The result of this settlement was to reduce goodwill at Burlington by $1,476. (See Note 1). In October 1997, PST settled a lawsuit pertaining to Circuit Chemistry, and Ozite settled the Dalen litigation. The impact of both settlements was accounted for as adjustments to previously recorded discontinued operations (see Notes 20(b) and Note 17). On November 11, 1997, the Company announced that it had signed an Agreement and Plan of Merger ("Agreement") with Tekni-Plex, Inc., ("Tekni-Plex") a privately -owned company, pursuant to which the Company would, through a merger ("Merger") become a wholly-owned subsidiary of Tekni-Plex. The Agreement provides that the owner of each share of common stock of the Company would receive $3.50 in cash for that share in the Merger. The Agreement and the Merger will be submitted to the shareholders of the Company for approval at the Company's annual shareholders' meeting expected to be held in January 1998. The Agreement and the Merger have been unanimously approved, and recommended to shareholders for adoption, by the Company's Board of Directors. Officers and directors of the Company owning approximately 10% of the outstanding common stock of the Company have agreed to vote their shares in favor of the Merger. The Agreement contains a number of conditions which must be satisfied in order for the Merger to occur, including the successful completion of a consent solicitation and tender offer for PST's 11.25% Senior Secured Notes due 2003, the receipt of all necessary governmental and regulatory approvals, and the absence of any changes occurring prior to the closing date which would have a material adverse significance with respect to the value of the Company and its subsidiaries, taken as a whole. The Agreement also requires that the outstanding minority common shareholders' interest in PST be eliminated, either through purchase or a short-form merger procedure under Delaware law, not later than immediately prior to completion of the Merger, at a price of $7.00 per share of PST common stock. The Merger is further subject to the receipt by Tekni-Plex of sufficient financing to pay for the Company shares, purchase the PST Notes tendered in the tender offer, and fund all other cash requirements of the Merger. Tekni-Plex has received commitments from Morgan Guaranty Trust Company of New York to provide senior bank financing and subordinated bridge loans in an aggregate amount which the parties believe will be sufficient to complete the Merger, subject to a number of conditions. The Agreement is terminable by Tekni-Plex , the Company, or either of them under certain circumstances. In the event the Agreement is terminated because the Company's Board of Directors withdraws or materially modifies its approval or recommendation of the Merger or the Agreement or another person, entity or group acquires beneficial ownership of 50% or more of the outstanding shares of the Company's Common Stock, the Company is obligated to pay a fee of $10 million to Tekni-Plex and to reimburse Tekni-Plex for up to $5 million of its expenses in connection with the Agreement and related transactions. The Company expects the Merger to be completed in February 1998, but cannot assure that all of the conditions to the Merger will be satisfied. Concurrently with execution of the Merger Agreement, Tekni-Plex purchased a Convertible Note issued by PureTec in the amount of $5 million. The loan will assist PureTec and PST in meeting expected cash requirements in the period prior to completion of the Merger. The Convertible Note bears interest at 13% and is convertible at any time following the 60th day after any termination of the Agreement into a number of shares of Common Stock sufficient to retire the principal amount of the Note plus accrued interest or in any event at a base conversion rate of one share of Common Stock per $2.72 of obligations owed under the Note. The Company is required to file a registration statement with respect to the Common Stock issuable upon conversion promptly following a termination of the Merger Agreement. The Convertible Note matures on September 30, 1998. The Convertible Note is subject to prepayment by the Company in cash at any time, and contains covenants and events of default customary for a debt instrument of this type. F-35 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) 19. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK The estimated fair value of cash and cash equivalents, accounts receivable, notes and interest receivable from officers, short-term borrowings, accounts payable and long-term debt, excluding those items discussed below, approximate those amounts reflected in the balance sheet based on pertinent information available to management. Management estimates the fair value of the Senior Secured Notes approximates $135,000 as these notes were trading at a price of approximately 108 at July 31, 1997. Management estimates the fair value of the OxyChem notes at July 31, 1997 approximates the carrying value. In connection with the acquisition from OxyChem, Burlington entered into two separate supply agreements and one supply and license agreement with OxyChem to supply certain critical components and chemicals utilized in production of the Company's products. These agreements extend for varying periods of time and each contain specified purchase prices and minimum purchase requirements for such materials. Burlington is entitled to search for new suppliers for these components, but is required to allow OxyChem to requote the price of the components if the price quote obtained in the market is more favorable to Burlington. Management believes that other suppliers could provide similar components to Burlington on comparable terms. During the years ended July 31, 1997 and 1996, Burlington purchased approximately $20,800 and $18,000, respectively of products from OxyChem under such agreements. Amounts due to OxyChem at July 31, 1997 and 1996 amounted to approximately $5,300 and $2,700, respectively. In addition, Burlington recorded sales to OxyChem in the year ended July 31, 1997 and 1996 of approximately $1,200 and $1,000, respectively. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Although credit risk related to the Company's trade receivables is limited due to the large number of customers in differing industries and geographic areas, sales to one customer accounted for approximately 12.7% ,16.9% and 19.8% of the company's net sales for the years ended July 31, 1997, 1996 and 1995, respectively. 20. COMMITMENTS AND CONTINGENCIES a. Leases The Company leases certain facilities under non-cancelable operating leases expiring through the year 2020. The Company is responsible for all taxes, insurance and maintenance on the facilities. Rent expense from continuing operations under operating leases approximated $4,479, $5,250 and $1,855 for the years ended July 31, 1997, 1996 and 1995, respectively. Included in rent expense for each year is approximately $150, attributable to a lease from a related party. A summary of the future minimum lease payments for continuing operations is as follows: Years Ending July 31, ------------ 1998 $4,719 1999 4,344 2000 4,112 2001 3,932 2002 3,302 Thereafter 3,735 ------- $24,144 ------- ------- F-36 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) b. Litigation On February 18, 1993, the Ware Chemical Co. ("Ware Chemical"), a former PST subsidiary (now dormant) was served with a third party complaint in the matter of United States v. Davis ("Davis"). In Davis, the United States has alleged that certain private entities are liable, pursuant to the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA"), for cleanup costs that have been incurred, and will be incurred in the future, with respect to the remediation of the Davis Landfill site in Rhode Island. Ware Chemical was owned by Dart Industries (now Kraft, Inc.) during the time in question (1975 - 1977), and Kraft has agreed to assume all responsibility. In June 1997, the Company filed suit against Occidental Chemical Corporation ("OxyChem"), alleging that certain postretirement benefit liabilities were substantially understated when Burlington acquired the acquisition from OxyChem (see Note 1). In August 1997, the Company and OxyChem agreed to settle this litigation. Pursuant to the terms of the settlement agreement, the Company has agreed to release OxyChem from any claim related to this liability in exchange for OxyChem's agreement to settle a $4 million subordinated term loan including accrued interest ("seller financing") for $3 million. A portion of the settlement has been accounted for as an adjustment to the purchase price, with the offset recorded against goodwill, with the remainder adjusting accrued interest based upon the seller financing. Ozite is also engaged in litigation in which it seeks damages from the former owner of Dalen, a discontinued segment of Ozite. In December 1987, Ozite commenced legal proceedings against the seller of Dalen, seeking monetary damages and other equitable relief from the seller for various misrepresentations made in its financial statements and other miscellaneous information presented on which Ozite elected to proceed with the purchase of such assets. The seller has counterclaimed for the enforcement of the seller's rights in the subject matter and for recovery of the balance of the purchase price in an amount approximately equal to $3,000 plus accrued interest, amounts claimed to be due under a consulting agreement, and punitive damages. Subsequent to July 31, 1997, the Dalen litigation has been settled. The impact of the settlement of the Dalen litigation has been reflected in the Company's net loss from discontinued operations as of July 31, 1997, as Ozite had previously reported the Dalen business which it had acquired as a discontinued operation in 1988. The settlement agreement with Dalen provided for Ozite to make two (2) payments of $500 each by October 15, 1997, and a payment for $2,250 by January 31, 1998. Interest accrues on the final payment of $2,250 from October 15, 1997, until it is paid at the rate of 8% per annum. If Ozite fails to make the payments required on October 15 and January 31, and such failure continues for 30 days after notice to Ozite, then following procedural steps, Ozite will be deemed to have confessed judgement on the amount due plus interest and the court will be free to pursue any available remedy in order to collect the amount due. Management believes that it has a number of alternatives available to finance the settlement payments to Dalen, and therefore it expects to be able to meet these final payment obligations by January 31, 1998. The Company has adjusted the previously established reserves for this litigation as the Company deems the settlement probable. Pursuant to the terms of the Exchange Agreement and 7% Subordinated Notes, upon the settlement of the Dalen litigation in excess of defined amounts, the Company has the ability to reclaim Exchange and Escrow shares or to reduce principal payments due on the 7% Subordinated Notes (see Note 13(a)). The Dalen litigation was settled for approximately $2,800 in excess of the amount defined in the agreements. Once the amount and the recovery of excess settlement costs is determined, the recovery of these excess costs will result in the reduction of goodwill, to be recorded by the Company in 1998. In January 1993 and 1994, the Company's Belgian subsidiary received income tax assessments aggregating approximately $1,979 (75,247,000 Belgian Francs) for the disallowance of certain foreign tax credits and investment losses claimed for the years ended July 31, 1990 and 1991. Additionally, in January 1995, the subsidiary received an income tax assessment of approximately $843 (32,083,000 Belgian Francs) for the year ended July 31, 1992. Although the future outcome of these matters are uncertain, the Company believes that its tax position was appropriate and that the assessments are without merit. Therefore, the Company has appealed and has not paid or accrued for the assessments. Based on the advice of legal counsel in Belgium, the Company believes that the assessment appeals will be accepted by the tax authorities F-37 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) in Belgium, although there can be no assurance whether or when such appeals will be accepted. PureTech Plastics ("PTIP"), certain of its directors, three former directors and its President were defendants in a lawsuit brought in 1989 in New Jersey Superior Court and are currently defendants in a lawsuit brought in 1989 in New Jersey Superior Court by Frank Tammera, Sr., a stockholder and former officer and director of PTIP and Frank Tammera, Jr., a former officer of PTIP. Trial of the Frank Tammera, Sr. lawsuit commenced in April 1991 and concluded in 1995. In March 1996, the New Jersey Superior Court decided that PTIP did not have to reinstate Mr. Tammera, Sr., that his termination had been for cause, and in March 1996 a NJ Superior Court decided for PTIP on all matters except that PTIP was obligated to pay him only approximately $30 of indebtedness, which PTIP had acknowledged, and $14 in royalties. Final judgement in the Frank Tammera, Sr. suit was entered on June 6, 1996. In August 1996, Mr. Tammera, Sr. appealed the court's decision. The Frank Tammera, Jr. lawsuit and two similar lawsuits from Michael and Albert Tammera, have been stayed pending the resolution of the Frank Tammera, Sr. lawsuit. In May 1992, PST and all of its directors as of 1988, as well as K and B Liquidating Corp. (a former subsidiary of PST which is being liquidated) were named in two lawsuits filed in the Minnesota state courts. The plaintiffs are Douglass Hutchinson (since deceased) and James Czaja, both of whom were former employees of a former subsidiary of PST, Circuit Chemistry Manufacturing Corp. ("Circuit Chemistry"). The suits alleged several causes of action, all of which center upon a claim that PST and/or other defendants did not adequately disclose sufficient information to the plaintiffs in connection with the acquisition from the plaintiffs by PST of their 20% equity interest in Circuit Chemistry, and the termination of their employment agreements. Subsequent to July 31, 1997, the cases brought by Czaja and Hutchinson have been settled by PST. Previously, management had expected these cases to be litigated, and management had expected that PST would win these cases. During fiscal 1997, PST filed for a summary judgement to dismiss all claims from Czaja and Hutchinson. This summary judgement motion was denied by the court. In light of the growing costs of litigation, and the remaining uncertainty of the outcome of a trial, management elected to settle these cases. The impact of the settlement of these cases is reflected in the Company's net loss from discontinued operations for the year ended July 31, 1997, as PST had previously reported Circuit Chemistry as a discontinued operation as of 1989. Total settlement payments to the plaintiffs in connection with this settlement are $1,725, which are accrued together with related legal costs at July 31, 1997. During February 1994, the Company and certain officers were named in five lawsuits purporting to be class actions which essentially allege that the Company failed to previously adequately disclose facts which resulted in significant losses reported by the Company. The Company entered into a settlement of these suits, whereby the Company (i) issued 450,000 warrants to acquire the Company's common stock at an exercise price of $4.61 per share, (ii) established an administration fund of $100 to cover the expenses and costs of administering the settlement and (iii) paid certain out-of-pocket costs not exceeding $50. The Company recorded $150 relating to items (ii) and (iii) in the year ended July 31, 1995 and $100 in the year ended July 31, 1996, upon issuance of the warrants. In the current year, litigation relating to Ozite Mfg. with MDC Wallcoverings and Ashley Alsip was settled. (See Note 17) Additionally, the Company is party to certain other litigations and environmental proceedings in the ordinary course of business, none of which it believes are likely to have a material adverse effect on its financial position or results of operations. F-38 PURETEC CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) c. Employment Agreements The following summarizes, in the aggregate, minimum annual salary and consulting fees that are due under various agreements: Years Ending Minimum July 31, Commitment -------- ---------- 1998 $453 1999 175 2000 22 d. Letters of Credit As of July 31, 1997, PST had available letters of credit of up to $1,000 from the CLC, of which $353 was outstanding. e. Bonuses Under the terms of the Asset Transfer Agreement with OxyChem, the Company is required to pay annual bonuses to salaried employees still employed by the Company through fiscal year 1998. For the years ended July 31, 1997 and 1996 these payments amounted to approximately $152 and $157, respectively. F-39 SCHEDULE II PURETEC CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands)
Additions/ (Reductions) Balance at Charged to Beginning Costs and Addition Related Accounts Balance at End Classification of Period Expenses to Ozite Merger Charged off of Period - -------------- --------- -------- --------------- ----------- --------- Year Ended July 31, 1995 Allowance for doubtful receivables $100 $ 49 $ -- (*) $ -- $ 149 Year Ended July 31, 1996 Allowance for doubtful receivables $149 $831 $ -- $ -- $ 980 Year Ended July 31, 1997 Allowance for doubtful receivables $980 $274 $ -- $ (100) $1,154
(*)Reserves of $2,550 related to Ozite receivables have been considered as reducing the related receivable balances to fair value. F-40 EX-2.1 2 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER dated as of November 11, 1997 among PURETEC CORPORATION, PLASTIC SPECIALTIES & TECHNOLOGIES, INC., TEKNI-PLEX, INC. and P. T. HOLDING, INC. TABLE OF CONTENTS1 ---------------------- PAGE ---- ARTICLE (1) THE MERGER SECTION 1.01. The Merger .................................................. 1 SECTION 1.02. Conversion of Shares.......................................... 2 SECTION 1.03. Surrender and Payment......................................... 3 SECTION 1.04. Dissenting Shares............................................. 4 SECTION 1.05. Stock Options................................................. 4 SECTION 1.06. Company Debt.................................................. 5 SECTION 1.07. PS&T Minority Interest........................................ 6 SECTION 1.08. Intercompany Loans............................................ 6 SECTION 1.09. Upstream Guarantees........................................... 6 ARTICLE 2 THE SURVIVING CORPORATION SECTION 2.01. Certificate of Incorporation.................................. 6 SECTION 2.02. Bylaws .................................................. 6 SECTION 2.03. Directors and Officers........................................ 7 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY SECTION 3.01. Corporate Existence and Power................................. 7 SECTION 3.02. Corporate Authorization....................................... 7 SECTION 3.03. Governmental Authorization.................................... 7 SECTION 3.04. Non-contravention............................................. 8 SECTION 3.05. Capitalization................................................ 8 SECTION 3.06. Subsidiaries and Investees.................................... 9 SECTION 3.07. SEC Filings ..................................................10 SECTION 3.08. Financial Statements..........................................11 SECTION 3.09. Disclosure Documents..........................................11 SECTION 3.10. Absence of Certain Changes....................................12 SECTION 3.11. No Undisclosed Material Liabilities...........................13 SECTION 3.12. Litigation ..................................................14 SECTION 3.13. Taxes ..................................................14 - -------- (1) The Table of Contents is not a part of this Agreement. PAGE ---- SECTION 3.14. Employee Benefits.............................................15 SECTION 3.15. Labor Matters.................................................18 SECTION 3.16. Compliance with Laws..........................................19 SECTION 3.17. Finders' Fees.................................................20 SECTION 3.18. Other Information.............................................20 SECTION 3.19. Environmental Matters.........................................20 SECTION 3.20. Material Contracts............................................23 SECTION 3.21. Properties ..................................................24 SECTION 3.22. Intellectual Property.........................................26 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER AND MERGER SUBSIDIARY SECTION 4.01. Corporate Existence and Power.................................27 SECTION 4.02. Corporate Authorization.......................................27 SECTION 4.03. Governmental Authorization....................................27 SECTION 4.04. Non-contravention.............................................28 SECTION 4.05. Disclosure Documents..........................................28 SECTION 4.06. Finders' Fees.................................................28 SECTION 4.07. Financing ..................................................29 SECTION 4.08. Absence of Certain Changes....................................29 SECTION 4.09. Buyer Financial Statements....................................29 ARTICLE 5 COVENANTS OF THE COMPANY SECTION 5.01. Conduct of the Company........................................30 SECTION 5.02. Stockholder Meeting; Proxy Material...........................31 SECTION 5.03. Access to Information.........................................32 SECTION 5.04. Other Offers..................................................32 SECTION 5.05. Notices of Certain Events.....................................33 SECTION 5.06. Cooperative Efforts...........................................33 SECTION 5.07. Loans to Affiliated Persons...................................34 SECTION 5.08. Severance Package.............................................34 SECTION 5.09. Proceeds of Convertible Note..................................34 ARTICLE 6 COVENANTS OF BUYER AND MERGER SUBSIDIARY SECTION 6.01. Obligations of Merger Subsidiary..............................35 SECTION 6.02. Voting of Shares..............................................35 ii PAGE ---- SECTION 6.03. Director and Officer Liability................................35 SECTION 6.04. Commitment Letters and Financing Agreements...................35 SECTION 6.05. Repurchase of Bonds...........................................36 ARTICLE 7 COVENANTS OF BUYER AND THE COMPANY SECTION 7.01. Best Efforts..................................................36 SECTION 7.02. Certain Filings...............................................36 SECTION 7.03. Public Announcements..........................................37 SECTION 7.04. Further Assurances............................................37 ARTICLE 8 CONDITIONS TO THE MERGER SECTION 8.01. Conditions to the Obligations of Each Party...................37 SECTION 8.02. Conditions to the Obligations of Buyer and Merger Subsidiary.................................38 SECTION 8.03. Conditions to the Obligations of the Company..................40 ARTICLE 9 TERMINATION SECTION 9.01. Termination ..................................................41 SECTION 9.02. Effect of Termination.........................................42 ARTICLE 10 MISCELLANEOUS SECTION 10.01. Notices ..................................................43 SECTION 10.02. Survival of Representations and Warranties...................44 SECTION 10.03. Amendments; No Waivers.......................................44 SECTION 10.04. Expenses ..................................................44 SECTION 10.05. Successors and Assigns.......................................45 SECTION 10.06. Governing Law................................................45 SECTION 10.07. Counterparts; Effectiveness..................................45 iii AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER dated as of November 11, 1997 among PureTec Corporation, a Delaware corporation (the "Company"), Plastic Specialties & Technologies, Inc., a Delaware corporation ("PS&T"), Tekni-Plex, Inc., a Delaware corporation ("Buyer"), and P.T. Holding, Inc., a Delaware corporation and a wholly-owned subsidiary of Buyer ("Merger Subsidiary"). WHEREAS, as a condition to Buyer's and Merger Subsidiary's willingness to enter into this Agreement, simultaneously with the execution of this Agreement Buyer is entering into a Stockholder Voting and Option Agreement (the "Voting Agreement") with certain stockholders of the Company; WHEREAS, simultaneously with the execution of this Agreement, Buyer, at the request of the Company and PS&T, is lending the Company $5,000,000 in exchange for a Convertible Note (the "Convertible Note") in order to bridge finance certain working capital needs of the Company and PS&T during the term of this Agreement; In consideration for the various agreements contained herein, in the Voting Agreement and in the Convertible Note, the parties hereto agree as follows: ARTICLE 1 THE MERGER SECTION 1.01. The Merger. (a) At the Effective Time, Merger Subsidiary shall be merged (the "Merger") with and into the Company in accordance with the General Corporation Law of the State of Delaware (the "Delaware Law"), whereupon the separate existence of Merger Subsidiary shall cease, and the Company shall be the surviving corporation (the "Surviving Corporation"). At the election of Buyer, the Merger may be structured so that the Company shall be merged with and into Merger Subsidiary with the result that Merger Subsidiary shall be the Surviving Corporation. (b) At the earliest time following satisfaction or, to the extent permitted hereunder, waiver of all conditions to the Merger, the Company and Merger Subsidiary will file a certificate of merger with the Secretary of State of the State of Delaware and make all other filings or recordings required by Delaware Law in connection with the Merger. The Merger shall become effective at such time as the certificate of merger is duly filed with the Secretary of State of the State of Delaware or at such later time as is specified in the certificate of merger (the "Effective Time"). (c) From and after the Effective Time, the Surviving Corporation shall possess all the rights, privileges, powers and franchises and be subject to all of the restrictions, disabilities and duties of the Company and Merger Subsidiary, all as provided under Delaware Law. (d) The Company hereby represents that its Board of Directors, at a meeting duly called and held, has (i) unanimously determined that this Agreement and the transactions contemplated hereby, including the Merger, are fair to and in the best interest of the Company's stockholders, (ii) unanimously approved this Agreement and the transactions contemplated hereby, including the Merger, which approval satisfies in full the requirements of Delaware Law, and (iii) unanimously resolved to recommend approval and adoption of this Agreement and the Merger by its stockholders; provided, that such recommendation may be withdrawn, modified or amended to the extent the Board of Directors of the Company deems it necessary to do so in the exercise of its fiduciary obligations to the Company's stockholders after being so advised by outside counsel. The Company further represents that Schroder & Co. Inc. ("Schroders") has delivered to the Company's Board of Directors its written opinion that the Merger Consideration is fair to the holders of Shares from a financial point of view. The Company has been advised that all of its directors and executive officers currently intend to vote their Shares in favor of the approval and adoption of this Agreement and the Merger. SECTION 1.02. Conversion of Shares. At the Effective Time: (a) each outstanding share (each a "Share") of common stock, $0.01 par value (the "Common Stock") of the Company held by the Company as treasury stock or owned by Buyer or any subsidiary of Buyer immediately prior to the Effective Time shall be canceled, and no payment shall be made with respect thereto; (b) each share of common stock of Merger Subsidiary outstanding immediately prior to the Effective Time shall be converted into and become one share of common stock of the Surviving Corporation with the same rights, powers and privileges as the shares so converted and shall constitute the only outstanding shares of capital stock of the Surviving Corporation; and 2 (c) each Share outstanding immediately prior to the Effective Time shall, except as otherwise provided in Section 1.02(a) or as provided in Section 1.04 with respect to Shares as to which appraisal rights have been exercised, be converted into the right to receive $3.50 in cash, without interest (the "Merger Consideration"). SECTION 1.03. Surrender and Payment. (a) Prior to the Effective Time, Buyer shall appoint an agent (the "Exchange Agent") for the purpose of exchanging certificates representing Shares for the Merger Consideration. Buyer will make available to the Exchange Agent, as needed, the Merger Consideration to be paid in respect of the Shares. For purposes of determining the Merger Consideration to be made available, Buyer shall assume that no holder of Shares will perfect his right to appraisal of his Shares. As soon as practicable after the Effective Time, Buyer will send, or will cause the Exchange Agent to send, to each holder of Shares at the Effective Time a letter of transmittal for use in such exchange (which shall specify that the delivery shall be effected, and risk of loss and title shall pass, only upon proper delivery of the certificates representing Shares to the Exchange Agent). (b) Each holder of Shares that have been converted into a right to receive the Merger Consideration, upon surrender to the Exchange Agent of a certificate or certificates representing such Shares, together with a properly completed letter of transmittal covering such Shares, will be entitled to receive the Merger Consideration payable in respect of such Shares. Until so surrendered, each such certificate shall, after the Effective Time, represent for all purposes, only the right to receive such Merger Consideration. (c) If any portion of the Merger Consideration is to be paid to a Person other than the registered holder of the Shares represented by the certificate or certificates surrendered in exchange therefor, it shall be a condition to such payment that the certificate or certificates so surrendered shall be properly endorsed or otherwise be in proper form for transfer and that the Person requesting such payment shall pay to the Exchange Agent any transfer or other taxes required as a result of such payment to a Person other than the registered holder of such Shares or establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable. For purposes of this Agreement, "Person" means an individual, a corporation, a limited liability company, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or any agency or instrumentality thereof. (d) After the Effective Time, there shall be no further registration of transfers of Shares. If, after the Effective Time, certificates representing Shares are presented to the Surviving Corporation, they shall be canceled and exchanged 3 for the Merger Consideration provided for, and in accordance with the procedures set forth, in this Article 1. (e) Any portion of the Merger Consideration made available to the Exchange Agent pursuant to Section 1.03(a) that remains unclaimed by the holders of Shares six months after the Effective Time shall be returned to Buyer, upon demand, and any such holder who has not exchanged his Shares for the Merger Consideration in accordance with this Section prior to that time shall thereafter look only to Buyer for payment of the Merger Consideration in respect of his Shares. Notwithstanding the foregoing, Buyer shall not be liable to any holder of Shares for any amount paid to a public official pursuant to applicable abandoned property laws. Any amounts remaining unclaimed by holders of Shares two years after the Effective Time (or such earlier date immediately prior to such time as such amounts would otherwise escheat to or become property of any governmental entity) shall, to the extent permitted by applicable law, become the property of Buyer free and clear of any claims or interest of any Person previously entitled thereto. (f) Any portion of the Merger Consideration made available to the Exchange Agent pursuant to Section 1.03(a) to pay for Shares for which appraisal rights have been perfected shall be returned to Buyer, upon demand. SECTION 1.04. Dissenting Shares. Notwithstanding Section 1.02, Shares outstanding immediately prior to the Effective Time and held by a holder who has not voted in favor of the Merger or consented thereto in writing and who has demanded appraisal for such Shares in accordance with Delaware Law shall not be converted into a right to receive the Merger Consideration, unless such holder fails to perfect or withdraws or otherwise loses his right to appraisal. If after the Effective Time such holder fails to perfect or withdraws or loses his right to appraisal, such Shares shall be treated as if they had been converted as of the Effective Time into a right to receive the Merger Consideration. The Company shall give Buyer prompt notice of any demands received by the Company for appraisal of Shares, and Buyer shall have the right to participate in all negotiations and proceedings with respect to such demands. The Company shall not, except with the prior written consent of Buyer, make any payment with respect to, or settle or offer to settle, any such demands. SECTION 1.05. Stock Options. (a) At the Effective Time, each holder of an outstanding stock option to purchase Shares, whether or not then vested or exercisable, granted under any employee or director stock option or compensation plan or arrangement of the Company shall be paid by the Company promptly upon surrender of such stock option an amount determined by multiplying (i) the excess, if any, of $3.50 per Share over the applicable exercise price per share of 4 such option by (ii) the number of Shares such holder could have purchased (assuming full vesting of all options) had such holder exercised such option in full immediately prior to the Effective Time. (b) Promptly following the Effective Time, the Company shall notify all holders of outstanding options or warrants to purchase Shares other than those referred to in subsection (a) above that such holders are entitled to receive the Merger Consideration upon surrender of such options or warrants and payment to the Company by the holder thereof of the applicable exercise price (and in the case of options referred to in Section 1.05(a), of such right to receive the payment described in Section 1.05(a) in lieu of exercising such option). SECTION 1.06. Company Debt. (a) PS&T Senior Notes. The Company shall cause PS&T to promptly commence a combined consent solicitation and offer to purchase (the "Debt Offer"), in accordance with applicable law and pursuant to documentation reasonably satisfactory to Buyer, any and all of PS&T's outstanding 11.25% Senior Secured Notes due 2003 (the "PS&T Notes") at a cash price to be specified by Buyer or at such other price as Buyer may specify from time to time thereafter. The Company shall cause PS&T to purchase the PS&T Notes tendered pursuant to the Debt Offer at the Effective Time. The Debt Offer shall be subject to the conditions that (i) there shall be validly tendered and not withdrawn in accordance with the terms of the Debt Offer prior to the expiration date of the Debt Offer, PS&T Notes in an aggregate principal amount representing at least a majority in principal amount of the PS&T Notes, (ii) the holders of at least a majority in principal amount of the PS&T Notes shall have consented prior to the Effective Time to amend the indenture dated as of October 29, 1993 between PS&T and First Fidelity Bank, N.A. Pennsylvania, as Trustee (the "PS&T Indenture") to delete such covenants, events of default and other provisions of the PS&T Indenture as Buyer shall specify and to make such other amendments to the PS&T Indenture as Buyer may require, and (iii) Buyer shall have consummated or, simultaneously with the consummation of the Debt Offer, shall consummate the Merger. (b) Other Subsidiary Debt. Prior to or simultaneously with the consummation of the Merger, the Company shall cause each of its Subsidiaries (as defined in Section 3.06) to repay and retire such of its outstanding debt (other than any PS&T Notes not tendered in the Debt Offer) as Buyer may require (it being understood that Buyer may require the Company and its Subsidiaries to retire any or all such debt). SECTION 1.07. PS&T Minority Interest. The Company shall eliminate the minority shareholders' interest in PS&T, either pursuant to an offer to purchase such minority shares or pursuant to section 253 of the Delaware Law, at a price of $7.00 5 per share of common stock of PS&T, at any time prior to but no later than immediately prior to the consummation of the Merger. SECTION 1.08. Intercompany Loans. Simultaneously with the consummation of the Merger, Buyer shall loan to each of the Company and its Subsidiaries, amounts sufficient to enable each of the Company and its Subsidiaries to comply with its obligations under Sections 1.05, 1.06, and 1.07. The loans referred to in this Section 1.08 are hereinafter referred to as the "Intercompany Loans". The obligations of the Company and its Subsidiaries under Sections 1.05, 1.06, and 1.07 are contingent upon receipt of Intercompany Loans in amounts sufficient to discharge such obligations. SECTION 1.09. Upstream Guarantees. Effective as of the Effective Time, the Company shall and shall cause each of its domestic Subsidiaries to guarantee (i) Buyer's 11 1/4% Senior Subordinated Notes due 2007, to the extent required by the indenture dated as of April 1, 1997 among Buyer, Dolco Packaging Corp. and Marine Midland Bank, as Trustee (the "Tekni-Plex Indenture"), and (ii) any indebtedness of Buyer issued to finance the transactions contemplated hereby. The guarantees to be issued pursuant to this Section 1.09 are hereinafter referred to as the "Upstream Guarantees". ARTICLE 2 THE SURVIVING CORPORATION SECTION 2.01. Certificate of Incorporation. The certificate of incorporation of Merger Subsidiary in effect at the Effective Time shall be the certificate of incorporation of the Surviving Corporation until amended in accordance with applicable law, except that the name of the Surviving Corporation shall be changed to "PureTec Corporation". SECTION 2.02. Bylaws. The bylaws of Merger Subsidiary in effect at the Effective Time shall be the bylaws of the Surviving Corporation until amended in accordance with applicable law. SECTION 2.03. Directors and Officers. From and after the Effective Time, until successors are duly elected or appointed and qualified in accordance with applicable law, (a) the directors of Merger Subsidiary at the Effective Time shall be the directors of the Surviving Corporation, and (b) the officers of the Company at the Effective Time shall be the officers of the Surviving Corporation, except for 6 the Chief Executive Officer, who from and after the Effective Time shall be the Chief Executive Officer of the Merger Subsidiary ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Buyer that: SECTION 3.01. Corporate Existence and Power. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. The Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except for those jurisdictions where the failure to be so qualified would not, individually or in the aggregate, have a material adverse effect on the condition (financial or otherwise), business, assets, results of operations or prospects of the Company and the Subsidiaries taken as a whole (a "Material Adverse Effect"). The Company has heretofore delivered to Buyer true and complete copies of the Company's certificate of incorporation and bylaws as currently in effect. SECTION 3.02. Corporate Authorization. The execution, delivery and performance by the Company of each of this Agreement and the Convertible Note and the consummation by the Company of the transactions contemplated hereby and thereby are within the Company's corporate powers and, except for any required approval by the Company's stockholders in connection with the consummation of the Merger, have been duly authorized by all necessary corporate action. Each of this Agreement and the Convertible Note constitutes a valid and binding agreement of the Company. SECTION 3.03. Governmental Authorization. The execution, delivery and performance by the Company of each of this Agreement and the Convertible Note and the consummation of the Merger by the Company require no action by or in respect of, or filing with, any governmental body, agency, official or authority, domestic or foreign, other than (a) the filing of a certificate of merger in accordance with Delaware Law; (b) compliance with any applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"); (c) compliance with any applicable requirements of the Securities Exchange Act 7 of 1934 and the rules and regulations promulgated thereunder (the "Exchange Act"); and (d) compliance with any applicable requirements of the New Jersey Industrial Site Recovery Act, as amended, and any rules or regulations promulgated thereunder ("ISRA"). SECTION 3.04. Non-contravention. Except as disclosed in Schedule 3.04, the execution, delivery and performance by the Company of each of this Agreement and the Convertible Note and the consummation by the Company of the transactions contemplated hereby and thereby do not and will not (a) contravene or conflict with the certificate of incorporation or bylaws of the Company, (b) assuming compliance with the matters referred to in Section 3.03, contravene or conflict with or constitute a violation of any provision of any law, regulation, judgment, injunction, order or decree binding upon or applicable to the Company or any Subsidiary, (c) constitute a default under or give rise to a right of termination, cancellation or acceleration of any right or obligation of the Company or any Subsidiary or to a loss of any benefit to which the Company or any Subsidiary is entitled under any provision of any agreement, contract or other instrument binding upon the Company or any Subsidiary or any license, franchise, permit or other similar authorization held by the Company or any Subsidiary, or (d) result in the creation or imposition of any Lien on any asset of the Company or any Subsidiary. For purposes of this Agreement, "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. SECTION 3.05. Capitalization. The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock and 1,000,000 shares of preferred stock, $0.01 par value (the "Preferred Stock"). As of October 31, 1997, there were outstanding 31,240,866 shares of Common Stock, and no shares of Preferred Stock. As of October 31, 1997, there were outstanding stock options (including employee stock options) and warrants to purchase shares of Common Stock as set forth in Schedule 3.05. The Board of Directors of the Company, as the applicable committee responsible for the 1995 Disinterested Directors Stock Option Plan and the 1995 Stock Option Plan (the "Company Option Plans"), has passed resolutions relating to the terms of the Company Option Plans clarifying, pursuant to the terms thereof, that following the Effective Time, each holder of an outstanding stock option to purchase Shares granted under either Company Option Plan shall thereafter have the right to receive Merger Consideration upon payment to the Company by such holder of the applicable exercise price therefor. All outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable. Except as set forth in this Section and except for changes after October 31, 1997 resulting from the exercise of employee stock options outstanding on such date and except for the Convertible Note, there are outstanding (a) no shares of capital stock or other 8 voting securities of the Company, (b) no securities of the Company convertible into or exchangeable for shares of capital stock or voting securities of the Company, and (c) no options or other rights to acquire from the Company, and no obligation of the Company to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of the Company (the items in clauses 3.05(a), 3.05(b) and 3.05(c) being referred to collectively as the "Company Securities"). There are no outstanding obligations of the Company or any Subsidiary to repurchase, redeem or otherwise acquire any Company Securities. SECTION 3.06. Subsidiaries and Investees. (a) Except as disclosed in Schedule 3.06(a), each Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted and is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned or leased by it or the nature of its activities makes such qualification necessary, except for those jurisdictions where failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect. For purposes of this Agreement, "Subsidiary" means any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are directly or indirectly owned by the Company. All Subsidiaries and their respective jurisdictions of incorporation are identified in the Company's annual report on Form 10-K for the fiscal year ended July 31, 1997 (the "Company 10-K"). (b) Except as disclosed in Schedule 3.06(b), all of the outstanding capital stock of, or other ownership interests in, each Subsidiary, is owned by the Company, directly or indirectly, free and clear of any Lien and free of any other limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of such capital stock or other ownership interests). There are no outstanding (i) securities of the Company or any Subsidiary convertible into or exchangeable for shares of capital stock or other voting securities or ownership interests in any Subsidiary, and (ii) options or other rights to acquire from the Company or any Subsidiary, and no other obligation of the Company or any Subsidiary to issue, any capital stock, voting securities or other ownership interests in, or any securities convertible into or exchangeable for any capital stock, voting securities or ownership interests in, any Subsidiary (the items in clauses 3.06(b)(i) and 3.06(b)(ii) being referred to collectively as the "Subsidiary Securities"). There are no outstanding obligations of the Company or any Subsidiary to repurchase, redeem or otherwise acquire any outstanding Subsidiary Securities. 9 (c) Schedule 3.06(c) sets forth (i) the name of each corporation, partnership, limited liability company or other entity (other than the Subsidiaries) in which the Company or any Subsidiary holds an equity interest (each an "Investee"), (ii) a description of such interests and the Investee and (iii) each agreement (including any agreements with other investors in such Investee) relating to the investment in such Investee. (d) Except as disclosed in Schedule 3.06(c), the interest of the Company or any Subsidiary in each Investee is owned by the Company, directly or indirectly, free and clear of any Liens and free of any other limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of such interest). Except as set forth in Schedule 3.06(c), there are no outstanding obligations of the Company or the Subsidiaries to invest in, contribute to or purchase any securities of or otherwise become obligated to invest in or contribute to or purchase any securities of any Investee. SECTION 3.07. SEC Filings. (a) Each of the Company and PS&T has delivered to Buyer (i) the annual reports on Form 10-K for its fiscal years ended July 31, 1995, 1996 and 1997, (ii) its quarterly reports on Form 10-Q for its fiscal quarters ended October 31, 1996, January 31, 1997 and April 30, 1997 and any quarterly reports on Form 10-Q filed subsequent thereto, (iii) its proxy or information statements relating to meetings of, or actions taken without a meeting by, the stockholders of the Company held since February 1, 1996, and (iv) all of its other reports, statements, schedules and registration statements filed with the Securities and Exchange Commission (the "SEC") since February 1, 1996. (b) As of its filing date, each such report or statement filed pursuant to the Exchange Act did not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. (c) Each such registration statement, as amended or supplemented, if applicable, filed pursuant to the Securities Act of 1933 as of the date such statement or amendment became effective did not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. SECTION 3.08. Financial Statements. The audited consolidated financial statements and unaudited consolidated interim financial statements of the Company included in its annual reports on Form 10-K and the quarterly reports on Form 10-Q referred to in Section 3.07 fairly present, in conformity with generally accepted accounting principles applied on a consistent basis (except as may be 10 indicated in the notes thereto), the consolidated financial position of the Company and its consolidated subsidiaries as of the dates thereof and their consolidated results of operations and changes in financial position for the periods then ended (subject to normal year-end adjustments in the case of any unaudited interim financial statements). For purposes of this Agreement, "Balance Sheet" means the consolidated balance sheet of the Company as of July 31, 1997 and the footnotes thereto set forth in the Company 10-K and "Balance Sheet Date" means July 31, 1997. SECTION 3.09. Disclosure Documents. (a) Each document required to be filed by the Company with the SEC or required to be distributed to the securityholders of the Company or its Subsidiaries in connection with the transactions contemplated by this Agreement (the "Company Disclosure Documents"), including, without limitation, the proxy statement of the Company (the "Company Proxy Statement") to be filed with the SEC in connection with the Merger, and the offer to purchase the PS&T Notes pursuant to the Debt Offer and any related documents (the "Debt Offer Documents") and any amendments or supplements thereto, when filed and /or mailed, as applicable, will comply as to form in all material respects with the applicable requirements of the Exchange Act. (b) At the time the Company Proxy Statement or any amendment or supplement thereto is first mailed to stockholders of the Company, at the time such stockholders vote on adoption of this Agreement and at the Effective Time, the Company Proxy Statement, as supplemented or amended, if applicable, will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. At the time of the filing of any Company Disclosure Document other than the Company Proxy Statement and at the time of any distribution thereof, such Company Disclosure Document will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties contained in this Section 3.09(b) will not apply to statements or omissions included in the Company Disclosure Documents based upon information furnished to the Company in writing by Buyer specifically for use therein. (c) The information with respect to the Company or any Subsidiary that the Company furnishes to Buyer in writing specifically for use in connection with the proposed offering of bonds of Buyer described in the Commitment Letters (the "New Bond Offering") will not, at the time of the filing, if any, thereof, at the time of any distribution thereof and at the time of the consummation of the 11 Debt Offer, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. SECTION 3.10. Absence of Certain Changes. Except for the transactions contemplated hereby, since the Balance Sheet Date, the Company and its Subsidiaries have conducted their business in the ordinary course consistent with past practice and there has not been: (a) any event, occurrence or development of a state of circumstances or facts which has had or reasonably could be expected to have a Material Adverse Effect; (b) except as disclosed in Schedule 3.10(b), any declaration, setting aside or payment of any dividend or other distribution with respect to any shares of capital stock of the Company, or any repurchase, redemption or other acquisition by the Company or any Subsidiary of any outstanding shares of capital stock or other securities of, or other ownership interests in, the Company or any Subsidiary; (c) any amendment of any material term of any outstanding security of the Company or any Subsidiary; (d) except for the Convertible Note or as disclosed in Schedule 3.10(d), any incurrence, assumption or guarantee by the Company or any Subsidiary of any indebtedness for borrowed money; (e) except as disclosed in Schedule 3.10(e), any creation or assumption by the Company or any Subsidiary of any Lien on any material asset other than in the ordinary course of business consistent with past practices; (f) except as disclosed in Schedule 3.10(f), any making of any loan, advance or capital contributions to or investment in any Person other than loans, advances or capital contributions to or investments in wholly-owned Subsidiaries made in the ordinary course of business consistent with past practices; (g) any damage, destruction or other casualty loss (whether or not covered by insurance) affecting the business or assets of the Company or any Subsidiary which, individually or in the aggregate, has had or would reasonably be expected to have a Material Adverse Effect; 12 (h) except as disclosed in Schedule 3.10(h), any transaction or commitment made, or any contract or agreement entered into, by the Company or any Subsidiary relating to its assets or business (including the acquisition or disposition of any assets) or any relinquishment by the Company or any Subsidiary of any contract or other right, in either case, material to the Company and the Subsidiaries taken as a whole, other than transactions and commitments in the ordinary course of business consistent with past practice and those contemplated by this Agreement and except for the sale of Styrex Industries, Inc.; (i) any change in any method of accounting or accounting practice by the Company or any Subsidiary, except for any such change required by reason of a concurrent change in generally accepted accounting principles; (j) except as contemplated by Section 5.08 or as disclosed in Schedule 3.10(j), any (i) grant of any severance or termination pay to any director, officer or employee of the Company or any Subsidiary, (ii) entering into of any employment, deferred compensation or other similar agreement (or any amendment to any such existing agreement) with any director, officer or employee of the Company or any Subsidiary, (iii) increase in benefits payable under any existing severance or termination pay policies or employment agreements or (iv) increase in compensation, bonus or other benefits payable to directors, officers or employees of the Company or any Subsidiary, other than in the ordinary course of business consistent with past practice; or (k) any labor dispute, other than routine individual grievances, or any activity or proceeding by a labor union or representative thereof to organize any employees of the Company or any Subsidiary, which employees were not subject to a collective bargaining agreement at the Balance Sheet Date, or any lockouts, strikes, slowdowns, work stoppages or threats thereof by or with respect to such employees. SECTION 3.11. No Undisclosed Material Liabilities. Except as disclosed in Schedule 3.11, there are no liabilities of the Company or any Subsidiary of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, and there is no existing condition, situation or set of circumstances which could reasonably be expected to result in such a liability, other than: (a) liabilities disclosed and provided for in the Balance Sheet; 13 (b) liabilities fully and specifically identified as such in the Company 10-K; (c) the Convertible Note; (d) liabilities incurred in the ordinary course of business consistent with past practice since the Balance Sheet Date, which (except for customary purchase orders) in the aggregate are not material to the Company and the Subsidiaries, taken as a whole; and (e) liabilities under this Agreement. SECTION 3.12. Litigation. Except as disclosed in Schedule 3.12, there is no action, suit, investigation or proceeding pending against, or to the knowledge of the Company threatened against or affecting, the Company or any Subsidiary (or any present or former officers, directors or employees of the Company or any Subsidiary for which the Company or any Subsidiary may be liable) or any of their respective properties before any court or arbitrator or any governmental body, agency or official which, if determined or resolved adversely to the Company or any Subsidiary in accordance with the plaintiff's demands, would reasonably be expected to have a Material Adverse Effect or which in any manner challenges or seeks to prevent, enjoin, alter or materially delay the Merger or any of the other transactions contemplated hereby. SECTION 3.13. Taxes. (a) For purposes of this Agreement, the following terms shall have the following meanings: "Tax" means any U.S. federal, state or local or foreign net or gross income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental, customs duties, capital stock, franchise, profits, withholding on amounts paid to or by the Company, social security (or similar), unemployment, disability, ad valorem, sales, use, transfer, recording, documentary, conveyancing, gains, registration, value added, alternative, or add-on minimum, estimated or other tax, governmental fee or other like assessment or charge of any kind whatsoever, however denominated, including any interest, penalty, or addition thereto, whether disputed or not, and "Tax Return" means any return, declaration, report, claim for refund or information return or statement relating to any Tax, including any schedule or attachment thereto, and including any amendment thereof. (b) Except as disclosed in Schedule 3.13(b), each of the Company and its Subsidiaries has filed all material Tax Returns required to be filed by it for Tax years ended prior to the date of this Agreement or requests for extensions have been timely filed and any such request shall have been granted and not expired and all such Tax Returns are true, correct and complete in all material respects, 14 paid or accrued all material Taxes shown to be due and payable on such Tax Returns and properly accrued in all material respects all such Taxes for such periods subsequent to the periods covered by such Tax Returns. (c) Except as disclosed in Schedule 3.13(c), no deficiency for any Taxes has been proposed, asserted or assessed against the Company or any Subsidiary which has not been resolved and paid in full. (d) There are no outstanding requests, agreements, consents or waivers to extend the statutory period of limitations applicable to the assessment of any Taxes or deficiencies against the Company or any Subsidiary, and no power of attorney granted by either the Company or any Subsidiary with respect to any Taxes is currently in force. (e) Except as disclosed in Schedule 3.13(e), neither the Company nor any Subsidiary has been a member of any group of entities (other than a group of which the Company is the common parent) filing an affiliated, combined, consolidated, unitary or similar Tax Return or is a party to any agreement providing for the allocation or sharing of Taxes. (f) Schedule 3.13(f) contains a complete and accurate list, as of July 31, 1996, of all of the accrued and unexpired net operating loss carryforward amounts of the Company and its Subsidiaries and their corresponding annual limitations under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). SECTION 3.14. Employee Benefits. (a) Schedule 3.14(a) sets forth a list of each "employee benefit plan", as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"), which (i) is subject to any provision of ERISA and (ii) is maintained, administered or contributed to by the Company or any Subsidiary and covers any employee or former employee of the Company or any Subsidiary or under which the Company or any Subsidiary has any liability. Copies of such plans (and, if applicable, related trust agreements) and all amendments thereto and written interpretations thereof have been furnished to Buyer together with (A) the three most recent annual reports (Form 5500 including, if applicable, Schedule B thereto) prepared in connection with any such plan and (B) the most recent actuarial valuation report prepared in connection with any such plan. Such plans are referred to collectively herein as the "Employee Plans". The only Employee Plans which individually or collectively would constitute an "employee pension benefit plan" as defined in Section 3(2) of ERISA (the "Pension Plans") are identified as such in the list referred to above. The Company has provided Buyer with complete age, salary, service and related data as of July 31, 1997 for employees and former employees 15 of the Company and any Subsidiary covered under the Pension Plans. As of the Effective Time, no Employee Plan will provide for and the Company will not be obligated to provide equity-based compensation or benefits. (b) Except as otherwise identified in the list referred to in Section 3.14(a), no Employee Plan constitutes a "multiemployer plan", as defined in Section 3(37) of ERISA (a "Multiemployer Plan"), and no Employee Plan is maintained in connection with any trust described in Section 501(c)(9) of the Code. The only Employee Plans that are subject to Title IV of ERISA (the "Retirement Plans") are identified in the list of such Plans heretofore provided to Buyer by the Company. Except as otherwise disclosed fully and specifically in the Company 10-K in accordance with Statement of Financial Accounting Standards ("SFAS") No. 87, as of the Balance Sheet Date, the fair market value of the assets of each Retirement Plan (excluding for these purposes any accrued but unpaid contributions) exceeded the projected benefit obligation for such plan determined in accordance with SFAS No. 87. No "accumulated funding deficiency", as defined in Section 412 of the Code, has been incurred with respect to any Pension Plan, whether or not waived. The Company knows of no "reportable event", within the meaning of Section 4043 of ERISA, and no event described in Section 4041, 4042, 4062 or 4063 of ERISA has occurred in connection with any Employee Plan, other than a "reportable event" that will not have a Material Adverse Effect. The assets of the Company and all of its Subsidiaries are not now, nor will they after the passage of time be, subject to any lien imposed under Code Section 412(n) by reason of a failure of any of the Company or any Subsidiary to make timely installments or other payments required under Code Section 412. No condition exists and no event has occurred that could constitute grounds for termination of any Retirement Plan or, with respect to any Employee Plan which is a Multiemployer Plan, presents a material risk of a complete or partial withdrawal under Title IV of ERISA and neither the Company nor any of its affiliates has incurred any material liability under Title IV of ERISA arising in connection with the termination of, or complete or partial withdrawal from, any plan covered or previously covered by Title IV of ERISA, which liability has not been paid in full. If a "complete withdrawal" by the Company and all of its affiliates were to occur as of the Effective Time with respect to all Employee Plans which are Multiemployer Plans, neither the Company nor any affiliate would incur any withdrawal liability under Title IV of ERISA that would have or reasonably be expected to have a Material Adverse Effect. Nothing done or omitted to be done and no transaction or holding of any asset under or in connection with any Employee Plan has or will make the Company or any Subsidiary, any officer or director of the Company or any Subsidiary subject to any liability under Title I of ERISA or liable for any tax pursuant to Section 4975 of the Code that could have a Material Adverse Effect. 16 (c) To the Company's knowledge, each Employee Plan which is intended to be qualified under Section 401(a) of the Code is so qualified and has been so qualified during the period from its adoption to date, and each trust forming a part thereof is exempt from tax pursuant to Section 501(a) of the Code. The Company has furnished to the Buyer copies of the most recent Internal Revenue Service determination letters with respect to each such Plan. Each Employee Plan has been maintained in substantial compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations, including but not limited to ERISA and the Code, which are applicable to such Plan. (d) There is no contract, agreement, plan or arrangement covering any employee or former employee of the Company or any Subsidiary that, individually or collectively, could give rise to the payment of any amount that would not be deductible pursuant to the terms of Section 280G of the Code. (e) Schedule 3.14(e) sets forth each written and material unwritten employment, severance or similar contract or arrangement or any written or any material unwritten plan, policy, fund, program or contract or arrangement of the Company and its Subsidiaries providing for compensation, bonus, profit-sharing, stock option, or other stock related rights or other forms of incentive or deferred compensation, vacation benefits, insurance coverage (including any self-insured arrangements), health or medical benefits, disability benefits, workers' compensation, supplemental unemployment benefits, severance benefits and post-employment or retirement benefits (including compensation, pension, health, medical or life insurance or other benefits) which (i) is not an Employee Plan, (ii) is entered into, maintained or contributed to, as the case may be, by the Company or any of its Subsidiaries and (iii) covers any employee or former employee of the Company or any of its Subsidiaries. Such contracts, plans and arrangements as are described above, copies or descriptions of all of which have been furnished previously to Buyer are referred to collectively herein as the "Benefit Arrangements". Each Benefit Arrangement has been maintained in substantial compliance with its terms and with the requirements prescribed by any and all statutes, orders, rules and regulations that are applicable to such Benefit Arrangement. (f) The excess of the present value of the projected liability in respect of post-retirement health and medical benefits for retired employees of the Company and its affiliates, determined using assumptions that are reasonable in the aggregate, over the fair market value of any fund, reserve or other assets segregated for the purpose of satisfying such liability (including for such purposes any fund established pursuant to Section 401(h) of the Code) has been disclosed fully and specifically in the Company 10-K and in accordance with SFAS No. 17 106. To the Company's knowledge, no condition exists that would prevent the Company or any Subsidiary from amending or terminating any Employee Plan or Benefit Arrangement providing health or medical benefits other than limitations imposed under the terms of a collective bargaining agreement. (g) Except as disclosed on Schedule 3.14(g), there has been no amendment to, written interpretation or announcement (whether or not written) by the Company or any of its Subsidiaries relating to, or change in employee participation or coverage under, any Employee Plan or Benefit Arrangement which would increase materially the expense of maintaining such Employee Plan or Benefit Arrangement above the level of the expense incurred in respect thereof for the fiscal year ended on the Balance Sheet Date. (h) Except as disclosed in Schedule 3.14(e), 3.14(h), and Schedule 3.15, neither the Company nor any Subsidiary is a party to any employment contract or arrangement providing for future compensation with any officer, consultant, director or employee. (i) Schedule 3.14(i) sets forth a true and complete list of (a) the names, titles, annual salaries and other compensation of all officers of the Company and its Subsidiaries and all other employees of the Company and its Subsidiaries whose annual base salary exceeds $50,000 and (b) the wage rates for non-salaried employees of the Company and its Subsidiaries (by classification). None of such employees and no other key employee of the Company and its Subsidiaries has indicated to the Company and its Subsidiaries that he intends to resign or retire as a result of the transactions contemplated by this Agreement or otherwise within one year after the Closing Date. SECTION 3.15. Labor Matters. The Company and the Subsidiaries are in compliance with all currently applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, and are not engaged in any unfair labor practice, failure to comply with which or engagement in which, as the case may be, would reasonably be expected to have a Material Adverse Effect. Except as disclosed in Schedule 3.15, (i) neither the Company nor any Subsidiary is a party, or is otherwise subject, to any collective bargaining agreement or other labor union contract applicable to its employees, (ii) there are no activities or proceedings by a labor union or representative thereof to organize any employees of the Company or any Subsidiary or to challenge the representative status of any union that currently represents such employees, (iii) there are no pending negotiations between the Company or any Subsidiary and any labor union or representative thereof, (iv) there are no pending, and the Company and the Subsidiaries have not experienced since January 1, 1995, any labor disputes, lockouts, strikes, slowdowns, work stoppages, or threats thereof, 18 (v) the Company and the Subsidiaries, and to the knowledge of the Company and the Subsidiaries, their employees, are not in default and have not breached in any material respect the terms of any applicable collective bargaining or other labor union contract, and there are no material grievances outstanding against the Company, any Subsidiary or, to the knowledge of the Company and the Subsidiaries, their employees under any such agreement or contract, (vi) there is no unfair labor practice complaint pending, or to the knowledge of the Company and the Subsidiaries threatened, against the Company or any Subsidiary before the National Labor Relations Board or any other investigation, charge, prosecution, suite or other proceeding before any court or arbitrator or any governmental body, agency or official relating to the employees of the Company or the Subsidiaries or the representation thereof, (vii) there are no claims or actions pending, or to the knowledge of the Company and the Subsidiaries, threatened, between the Company and the Subsidiaries and any of their employees or labor organizations representing or seeking to represent such employees, (viii) the Company and the Subsidiaries have complied with the Worker Adjustment and Retraining Notification Act of 1988 and any similar state or local laws regulating layoffs or employment terminations and (ix) to the knowledge of the Company and the Subsidiaries, there are no facts or circumstances involving any employee that would form the basis of, or give rise to, any cause of action, including, without limitation, unlawful termination based on discrimination of any kind. SECTION 3.16. Compliance with Laws. (a) Neither the Company nor any Subsidiary is in violation of, or has violated in the past five years, any applicable provisions of any laws, statutes, ordinances or regulations, except where such violations individually or in the aggregate do not have or reasonably would not be expected to have a Material Adverse Effect. (b) Each of the products produced or sold by the Company or any Subsidiary is, and at all times up to and including the sale thereof has been, (i) in compliance in all material respects with all applicable federal, state, local and foreign laws and regulations and (ii) fit for the ordinary purposes for which it is intended to be used and conforms in all material respects to any promises or affirmations of fact made on the container or label for such product or in connection with its sale, except where such noncompliance or failure to be fit individually or in the aggregate do not have and would not reasonably be expected to have a Material Adverse Effect. There is no design defect with respect to any of such products and each of such products contains adequate warnings, presented in a reasonably prominent manner, in accordance with applicable laws, rules and regulations and current industry practice with respect to its contents and use, except where such defects or failure to provide adequate warnings do not have and would not reasonably be expected to have a Material Adverse Effect. 19 (c) Schedule 3.16 correctly describes each license, franchise, permit, certificate, approval or other similar authorization affecting, or relating in any way to, the assets or business of the Company and its Subsidiaries, the absence of which would prevent the Company or any Subsidiary from operating in the ordinary course of business (the "Permits"). The Permits are valid and in full force and effect. Neither the Company nor any Subsidiary is in default under, and no condition exists that with notice or lapse of time or both would constitute a default under, the Permits. None of the Permits will be terminated or impaired or become terminable, in whole or in part, as a result of the transactions contemplated hereby. SECTION 3.17. Finders' Fees. Except for Schroders, a copy of whose engagement agreement has been provided to Buyer, there is no investment banker, broker, finder or other intermediary which has been retained by or is authorized to act on behalf, of the Company or any Subsidiary who might be entitled to any fee or commission from Buyer or any of its affiliates upon consummation of the transactions contemplated by this Agreement. SECTION 3.18. Other Information. The Confidential Information Memorandum dated July 1997, previously delivered to Buyer, except for the projections contained therein, did not, as of its date, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein not misleading. The financial projections relating to the Company and the Subsidiaries delivered to Buyer were based upon reasonable assumptions as of the date of such projections. Except for the requirement that the Company comply with Section 5.01(d), the Company is not currently aware of any fact or information that would lead it to believe that such projections are incorrect or misleading in any material respect. SECTION 3.19. Environmental Matters. (a) Except as disclosed on Schedule 3.19(a): (i) no written notice, notification, demand, request for information, citation, summons, complaint or order has been received by, or, to the knowledge of the Company or any Subsidiary, is pending or threatened by any Person against, the Company or any Subsidiary nor has any material penalty been assessed against the Company or any Subsidiary with respect to any (A) alleged violation of any Environmental Law or liability thereunder, (B) alleged failure to have any permit, certificate, license, approval, registration or authorization required under any Environmental Law, (C) generation, treatment, storage, recycling, transportation or disposal of any Hazardous Substance or (D) discharge, emission or release of any Hazardous Substance; 20 (ii) no polychlorinated biphenyls, radioactive material, lead, asbestos-containing material, incinerator, sump, surface impoundment, lagoon, landfill, septic, wastewater treatment or other disposal system or underground storage tank (active or inactive) is or has been present at, on or under any property now or previously owned, leased or operated by the Company or any Subsidiary, except where the presence of such items individually or in the aggregate would not reasonably be expected to have a Material Adverse Effect; (iii) the Company and its Subsidiaries are and have been in material compliance with all Environmental Laws (including without limitation ISRA and its predecessors and the new system performance standards and upgrading requirements for underground storage tanks contained in Subtitle I of the Resource Conservation and Recovery Act, 42 U.S.C. section 6991, et seq., as amended, and any rules or regulations promulgated thereunder, including 40 C.F.R. section 280.20, et seq.) and have obtained and are and have been in material compliance with all Environmental Permits; and such Environmental Permits are valid and in full force and effect and will not be terminated or impaired or become terminable, in whole or in part, as a result of the transactions contemplated hereby; (iv) no property now or previously owned, leased or operated by the Company or any Subsidiary nor any property to which the Company or any Subsidiary has, directly or indirectly, transported or arranged for the transportation of any Hazardous Substances is listed or, to the Company's knowledge, proposed for listing, on the National Priorities List promulgated pursuant to CERCLA, on CERCLIS (as defined in CERCLA) or on any similar federal, state or foreign list of sites requiring investigation or clean-up; (v) neither the Company nor any Subsidiary owns, leases or operates or has owned, leased or operated any property or has conducted any operations in New Jersey or Connecticut; (vi) except as in compliance with applicable Environmental Laws and in a manner which is not reasonably likely to effect adversely the Company or any of its Subsidiaries or any of their currently or previously owned, leased or operated properties, no Hazardous Substance has been discharged, disposed of, dumped, injected, pumped, deposited, spilled, leaked, emitted, released or is present at any property now or previously owned, leased or operated by the Company or any Subsidiary, and 21 (vii) there are no liabilities of or relating to the Company and any Subsidiary, whether contingent or fixed, actual or potential, known or unknown, which (A) arise under or relate to matters covered by Environmental Laws and (B) relate to actions occurring or conditions existing on or prior to the Effective Time, except for such liabilities which individually or in the aggregate would not reasonably be expected to have a Material Adverse Effect. (b) Except as set forth in Schedule 3.19(b), there has been no environmental investigation, study, audit, test, review or other analysis conducted of which the Company has knowledge in relation to the current or prior business of the Company or any property or facility now or previously owned or leased by the Company or any Subsidiary. (c) For purposes of this Section, the following terms shall have the meanings set forth below: (i) "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and any rules or regulations promulgated thereunder; (ii) "Company" and "Subsidiary" shall include any entity which is, in whole or in part, a predecessor of the Company or any Subsidiary; (iii) "Environmental Laws" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, codes, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and governmental restrictions, relating to human health, the environment or to emissions, discharges or releases of pollutants, contaminants or other hazardous substances or wastes into the environment, including without limitation ambient air, surface water, ground water or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants or other hazardous substances or wastes or the clean-up or other remediation thereof; and (iv) "Hazardous Substances" means any toxic, radioactive, corrosive or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics, which in any event is regulated under Environmental Laws. 22 SECTION 3.20. Material Contracts. (a) Except as filed as an exhibit to the Company 10-K or as disclosed in Schedule 3.20(a), neither the Company nor any Subsidiary is a party to or bound by: (i) any (A) lease of real property or (B) any lease of personal property providing for annual rentals of $50,000 or more; (ii) any agreement greater than three months in term for the purchase of materials, supplies, goods, services, equipment or other assets providing for annual payments by the Company and its Subsidiaries of $500,000 or more; (iii) any sales, distribution or other similar agreement greater than three months in term providing for the sale by the Company or any Subsidiary of materials, supplies, goods, services, equipment or other assets that provides for annual payments to the Company and the Subsidiaries of $1,000,000 or more; (iv) any partnership, joint venture or other similar agreement or arrangement; (v) any agreement relating to the acquisition or disposition of any business (whether by merger, sale of stock, sale of assets or otherwise); (vi) any agreement relating to indebtedness for borrowed money or the deferred purchase price of property (in either case, whether incurred, assumed, guaranteed or secured by any asset) other than the Convertible Note and (as of the Effective Time of the Merger) the Upstream Guarantees; (vii) any option, license, franchise or similar agreement; (viii) any agency, dealer, sales representative, marketing or other similar agreement (A) providing for annual sales of $250,000 or more, (B) under which the Company expects to provide for annual sales of $250,000 or more or (C) with any party with whom the Company made $250,000 or more of sales during the fiscal year ended July 31, 1997; (ix) any agreement that limits the freedom of the Company or any Subsidiary to compete in any line of business or with any Person or in any area or which would so limit the freedom of the Company or any Subsidiary after the Closing Date; 23 (x) any agreement with (A) any Person directly or indirectly owning, controlling or holding with power to vote, 5% or more of the outstanding voting securities of the Company or any of its Affiliates, or (B) any director or officer of the Company or any Subsidiary or any "associates" or members of the "immediate family" (as such terms are respectively defined in Rule 12b-2 and Rule 16a-1 of the Exchange Act) of any such director or officer; or (xi) any other agreement, commitment, arrangement or plan not made in the ordinary course of business that is material to the Company and the Subsidiaries, taken as a whole. (b) Each agreement, contract, plan, lease, arrangement or commitment disclosed in any Schedule to this Agreement or required to be disclosed pursuant to this Section is a valid and binding agreement of the Company or a Subsidiary, as the case may be, and is in full force and effect, and, except as disclosed in Schedule 3.20(b) none of the Company, any Subsidiary or, to the knowledge of the Company and its Subsidiaries, any other party thereto is in default or breach in any material respect under the terms of any such agreement, contract, plan, lease, arrangement or commitment, and, to the knowledge of the Company and its Subsidiaries, no event or circumstance has occurred that, with notice or lapse of time or both, would constitute such an event of default thereunder. True and complete copies of each such agreement, contract, plan, lease, arrangement or commitment have been delivered to Buyer, unless the failure to deliver such agreement, contract, plan, lease, arrangement or commitment is indicated next to such item in Schedule 3.20(a). (c) All of the Company's and its Subsidiaries' indebtedness for borrowed money may be prepaid at any time without penalty, except as set forth in Schedule 3.20(c). SECTION 3.21. Properties. (a) Except as set forth in Schedule 3.21, the Company and the Subsidiaries have good and marketable, indefeasible, fee simple title to, or in the case of leased property and assets have valid leasehold interests in, all property and assets (whether real, personal, tangible or intangible) reflected on the Balance Sheet or acquired after the Balance Sheet Date, except for properties and assets sold since the Balance Sheet Date in the ordinary course of business consistent with past practices. None of such property or assets is subject to any Lien, except: (i) Liens disclosed on the Balance Sheet; 24 (ii) Liens fully and specifically identified as such in the Company 10-K; (iii) Liens for taxes not yet due or being contested in good faith (and for which adequate accruals or reserves have been established on the Balance Sheet); or (iv) Liens which do not materially detract from the value or materially interfere with any present or intended use of such property or assets (clauses (i)-(iii) of this Section 3.21(a) are, collectively, the "Permitted Liens"). (b) There are no developments affecting any such property or assets pending or, to the knowledge of the Company or any Subsidiary threatened, which might materially detract from the value, materially interfere with any present or intended use or materially adversely affect the marketability of any such property or assets. (c) All leases of such real property and personal property are in good standing and are valid, binding and enforceable in accordance with their respective terms and there does not exist under any such lease any default or any event which with notice or lapse of time or both would constitute a default. (d) The plants, buildings, structures and equipment owned by the Company or any Subsidiary have no material defects, are in good operating condition and repair and have been reasonably maintained consistent with standards generally followed in the industry (giving due account to the age and length of use of same, ordinary wear and tear excepted), are adequate and suitable for their present uses and, in the case of plants, buildings and other structures (including, without limitation, the roofs thereof), are structurally sound. (e) The plants, buildings and structures owned by the Company or any Subsidiary currently have access to (i) public roads or valid easements over private streets or private property for such ingress to and egress from all such plants, buildings and structures and (ii) water supply, storm and sanitary sewer facilities, telephone, gas and electrical connections, fire protection, drainage and other public utilities, in each case as is necessary for the conduct of the businesses of the Company or any Subsidiary as heretofore conducted. None of the structures on any such owned or leased real property encroaches upon real property of another Person, and no structure of any other Person substantially encroaches upon any of such owned or leased real property. 25 (f) Such real property, and its continued use, occupancy and operation as currently used, occupied and operated, does not constitute a nonconforming use under all applicable building, zoning, subdivision and other land use and similar laws, regulations and ordinances, the presence of which would reasonably be expected to have a Material Adverse Effect. SECTION 3.22. Intellectual Property. (a) Schedule 3.22(a) contains a list of all Intellectual Property Rights owned or licensed and used or held for use by the Company or any Subsidiary ("Company Intellectual Property Rights"), specifying as to each, as applicable: the nature of such Intellectual Property Right, the owner of such Intellectual Property Right, the jurisdictions by or in which such Intellectual Property Right is recognized (without regard to registration) or has been issued or registered or in which an application for such issuance or registration has been filed, the registration or application numbers and the termination or expiration dates. "Intellectual Property Right" means any trademark, service mark, trade name, mask work, invention, patent, trade secret, copyright, know-how (including any registrations or applications for registration of any of the foregoing) or any other similar type of proprietary intellectual property right. (b) Schedule 3.22(b) sets forth a list of all licenses, sublicenses and other agreements as to which the Company or any Subsidiary is a party and pursuant to which any Person is authorized to use any Company Intellectual Property Right, including (i) the identity of all parties thereto, (ii) a description of the nature and subject matter thereof, (iii) the applicable royalty and (iv) the term thereof. (c) (i) Since January 1, 1993, neither the Company nor any Subsidiary has been a defendant in any action, suit, investigation or proceeding relating to, or otherwise has been notified of, any alleged claim of infringement of any Intellectual Property Right, and the Company nor any Subsidiary has any knowledge of any other such infringement by the Company or any Subsidiary and (ii) the Company nor any Subsidiary has no outstanding claim or suit for, and has no knowledge of, any continuing infringement by any other Person of any Company Intellectual Property Rights. No Company Intellectual Property Right is subject to any outstanding judgment, injunction, order, decree or agreement restricting the use thereof by the Company or any Subsidiary or restricting the licensing thereof by the Company or any Subsidiary to any Person. Neither the Company nor any Subsidiary has entered into any agreement to indemnify any other Person against any charge of infringement of any Intellectual Property Right. 26 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF BUYER AND MERGER SUBSIDIARY Each of Buyer and Merger Subsidiary, jointly and severally, represents and warrants to the Company that: SECTION 4.01. Corporate Existence and Power. Each of Buyer and Merger Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. Since the date of its incorporation, Merger Subsidiary has not engaged in any activities other than in connection with or as contemplated by this Agreement or in connection with arranging any financing required to consummate the transactions contemplated hereby. SECTION 4.02. Corporate Authorization. The execution, delivery and performance by Buyer and Merger Subsidiary of this Agreement and the consummation by Buyer and Merger Subsidiary of the transactions contemplated hereby are within the corporate powers of Buyer and Merger Subsidiary and have been duly authorized by all necessary corporate action. This Agreement constitutes a valid and binding agreement of each of Buyer and Merger Subsidiary. The Commitment Letters (as defined in Section 4.07) have been duly authorized by all necessary corporate action of Buyer and constitute valid and binding agreements of Buyer. SECTION 4.03. Governmental Authorization. The execution, delivery and performance by Buyer and Merger Subsidiary of this Agreement and the consummation by Buyer and Merger Subsidiary of the transactions contemplated by this Agreement and the Commitment Letters require no action by or in respect of, or filing with, any governmental body, agency, official or authority, domestic or foreign, other than (a) the filing of a certificate of merger in accordance with Delaware Law, (b) compliance with any applicable requirements of the HSR Act; (c) compliance with any applicable requirements of the Securities Act of 1933, the Exchange Act and state securities and "blue sky" laws, (d) compliance with any applicable requirements of ISRA and (e) filings and recordings of financing statements, mortgages and other instruments in connection with the perfection of liens contemplated by the Commitment Letters. SECTION 4.04. Non-contravention. The execution, delivery and performance by Buyer and Merger Subsidiary of this Agreement and the 27 consummation by Buyer and Merger Subsidiary of the transactions contemplated hereby do not and will not, subject to the consummation of the transactions contemplated by Section 6.05, if necessary, (a) contravene or conflict with the certificate of incorporation or bylaws of Buyer or Merger Subsidiary, (b) assuming compliance with the matters referred to in Section 4.03, contravene or conflict with any provision of law, regulation, judgment, order or decree binding upon Buyer or Merger Subsidiary, or (c) constitute a default under or give rise to any right of termination, cancellation or acceleration of any right or obligation of Buyer or Merger Subsidiary or to a loss of any benefit to which Buyer or Merger Subsidiary is entitled under any agreement, contract or other instrument binding upon Buyer or Merger Subsidiary, including without limitation, the Tekni-Plex Indenture, other than under Buyer's $75 million revolving credit facility with Morgan Guaranty Trust Company of New York, the commitments under which are expected to be terminated and all amounts owed thereunder to be repaid pursuant to the terms of the Financing (as defined in Section 4.07). Buyer is not in default or in breach in any material respect under the Tekni-Plex Indenture, and to the knowledge of Buyer, no event or circumstance has occurred that, with notice or lapse of time or both, would constitute an event of default thereunder. SECTION 4.05. Disclosure Documents. The information with respect to Buyer and its subsidiaries that Buyer furnishes to the Company in writing specifically for use in any Company Disclosure Document will not contain, any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading (i) in the case of the Company Proxy Statement at the time the Company Proxy Statement or any amendment or supplement thereto is first mailed to stockholders of the Company, at the time the stockholders vote on adoption of this Agreement and at the Effective Time, and (ii) in the case of any Company Disclosure Document other than the Company Proxy Statement, at the time of the filing thereof and at the time of any distribution thereof. SECTION 4.06. Finders' Fees. Except for J.P. Morgan & Co. Incorporated, whose fees will be paid by Buyer, there is no investment banker, broker, finder or other intermediary who might be entitled to any fee or commission from the Company or any of its affiliates upon consummation of the transactions contemplated by this Agreement. SECTION 4.07. Financing. Buyer has received and furnished copies to the Company of (i) a commitment letter from Morgan Guaranty Trust Company of New York (the "Lender") dated as of November 11, 1997 pursuant to which the Lender has committed, subject to the terms and conditions thereof, to provide up to $255 million of senior secured financing (the "Senior Secured Commitment 28 Letter") and (ii) a commitment letter from the Lender dated as of November 11, 1997, pursuant to which the Lender has committed, subject to the terms and conditions thereof, to enter into a bridge loan agreement with Buyer to provide $225 million of senior subordinated bridge financing (the "Bridge Commitment Letter", together with the Senior Secured Commitment Letter, the "Commitment Letters"). The credit agreement and the bridge loan agreement referred to in the Commitment Letters are referred to herein as the "Financing Agreements", and the financing to be provided thereunder or under any alternative arrangements made by Buyer is referred to herein as the "Financing". As of the date hereof, Buyer knows of no facts or circumstances that are reasonably likely to result in any of the conditions set forth in the Commitment Letters not being satisfied. As of the date hereof, Buyer knows of no facts or circumstances that would permit the Lender to terminate either of the Commitment Letters pursuant to the terms thereof. SECTION 4.08. Absence of Certain Changes. Since June 27, 1997, there has not been any event, occurrence or development of a state of circumstances or fact which has had or reasonably could be expected to have a material adverse effect on the business, condition (financial or other), results of operations or prospects of the Company and Buyer, taken as whole. SECTION 4.09. Buyer Financial Statements. The audited consolidated financial statements of Buyer contained in the Buyer's Registration Statement on Form S-4, as amended (File No. 333-28157) fairly present, in conformity with generally accepted accounting principles applied on a consistent basis (except as may be indicated in the notes thereto), the consolidated financial position of Buyer and its consolidated subsidiaries as of the date thereof and their consolidated results of operations and changes in financial position for the periods then ended. ARTICLE 5 COVENANTS OF THE COMPANY The Company agrees that: SECTION 5.01. Conduct of the Company. From the date hereof until the Effective Time, the Company and the Subsidiaries shall conduct their business in the ordinary course consistent with past practice and shall use their best efforts to preserve intact their business organizations and relationships with third parties and to keep available the services of their present officers and employees. Without 29 limiting the generality of the foregoing, except as disclosed in Schedule 5.01, from the date hereof until the Effective Time: (a) the Company will not adopt or propose any change in its certificate of incorporation or bylaws; (b) the Company will not, and will not permit any Subsidiary to, merge or consolidate with any other Person or acquire a material amount of assets of any other Person; (c) the Company will not, and will not permit any Subsidiary to, sell, lease, license or otherwise dispose of any material assets or property except (i) pursuant to existing contracts or commitments and (ii) inventory in the ordinary course consistent with past practice; (d) the Company will not, and will not permit any Subsidiary to, commit to make or make any capital expenditures without the prior written consent of Buyer, other than (x) in respect of commitments existing on the date hereof as disclosed on Schedule 5.01(d) or (y) maintenance capital expenditures in the ordinary course of business and in an aggregate amount for clauses (x) and (y) on a combined basis not to exceed $100,000 per calendar month during the period beginning on November 1, 1997 and ending on March 31, 1998; and the Company will not and will not permit any Subsidiary to, commit to make any capital expenditure without the prior written consent of Buyer to the extent that any such capital expenditures are payable after March 31, 1998; (e) the Company shall cause the aggregate dollar value (determined in accordance with generally accepted accounting principles applied on a consistent basis) of inventories comprising the asset base for the PS&T Credit Agreement (as defined in Section 5.09) and owned by PS&T or its Subsidiaries to remain at or below (i) $59 million during the month of November 1997, (ii) $60.4 million during the month of December 1997, (iii) $57 million during the month of January 1998, (iv) $55.5 million during the month of February 1998 and (v) $51.8 million during the month of March 1998; (f) the Company shall cause the aggregate accounts payable (determined in accordance with generally accepted accounting principles applied on a consistent basis but excluding fees and expenses arising out of the transactions contemplated by this Agreement) of the Company and its Subsidiaries on a consolidated basis (exclusive of accounts payable by Burlington Resins, Inc. and accounts payable by any European 30 Subsidiaries) to remain at or to exceed (i) $17.5 million during the month of November 1997, (ii) $17.0 million during the month of December 1997, (iii) $21.5 million during the month of January 1998, (iv) $23.6 million during the month of February 1998 and (v) $24.1 million during the month of March 1998; (g) the Company will not, and will not permit any Subsidiary to, incur any additional indebtedness for borrowed money except for borrowings in the ordinary course of business by certain Subsidiaries under existing working capital facilities disclosed in Schedule 3.10(d), as in effect on the date hereof, and, in the case of PS&T, in accordance with Section 5.09; (h) the Company will not, and will not permit any Subsidiary to, agree or commit to do any of the foregoing; or (i) the Company will not, and will not permit any Subsidiary to (i) take or agree or commit to take any action that would make (x) any representation and warranty of the Company hereunder that is qualified as to materiality inaccurate in any respect or (y) any representation and warranty of the Company hereunder that is not qualified as to materially inaccurate in any material respect, in each case at, or as of any time prior to, the Effective Time or (ii) omit or agree or commit to omit to take any action necessary to prevent any such representation or warranty from being inaccurate in any respect (or, with respect to representations and warranties described in clause (y), in any material respect) at any such time. SECTION 5.02. Stockholder Meeting; Proxy Material. The Company shall cause a meeting of its stockholders (the "Company Stockholder Meeting") to be duly called and held as soon as reasonably practicable for the purpose of voting on the approval and adoption of this Agreement and the Merger unless a vote of stockholders of the Company is not required by Delaware Law. The Directors of the Company shall, subject to their fiduciary duties as advised by counsel, recommend approval and adoption of this Agreement and the Merger by the Company's stockholders. In connection with such meeting, the Company (a) will promptly prepare and file with the SEC, will use its best efforts to have cleared by the SEC and will thereafter mail to its stockholders as promptly as practicable the Company Proxy Statement and all other related materials for such meeting, (b) will use its best efforts to obtain the necessary approvals by its stockholders of this Agreement and the transactions contemplated hereby and (c) will otherwise comply with all legal requirements applicable to such meeting. 31 SECTION 5.03. Access to Information. From the date hereof until the Effective Time, the Company will give Buyer, its counsel, financial advisors, auditors and other authorized representatives full access to the offices, properties, books and records of the Company and the Subsidiaries (including access to perform physical examinations and to take samples of the soil, groundwater, air, products or other areas as desired by Buyer in its sole discretion), will furnish to Buyer, its counsel, financial advisors, auditors and other authorized representatives such financial and operating data and other information as such Persons may reasonably request and will instruct the Company's employees, counsel and financial advisors to cooperate with Buyer in its investigation of the business of the Company and the Subsidiaries. SECTION 5.04. Other Offers. From the date hereof until the termination hereof, the Company and the Subsidiaries and the officers, directors, employees or other agents of the Company and the Subsidiaries will not, directly or indirectly, (i) take any action to solicit, initiate or take any action knowingly to facilitate the submission of any Acquisition Proposal or (ii) subject to the fiduciary duties of the Board of Directors under applicable law as advised by Winthrop, Stimson, Putnam & Roberts, counsel to the Company, engage in negotiations with, or disclose any nonpublic information relating to the Company or any Subsidiary or afford access to the properties, books or records of the Company or any Subsidiary to, any Person, except to customers and suppliers of the Company and its Subsidiaries in the ordinary course of business. The Company will promptly notify Buyer after receipt of any Acquisition Proposal or any indication that any Person is considering making an Acquisition Proposal or any request for nonpublic information relating to the Company or any Subsidiary or for access to the properties, books or records of the Company or any Subsidiary by any Person that may be considering making, or has made, an Acquisition Proposal and will keep Buyer fully informed of the status and, subject to the fiduciary duties of the Board of Directors of the Company under Delaware Law, details of any such Acquisition Proposal, indication or request. For purposes of this Agreement, "Acquisition Proposal" means any offer or proposal for, or any indication of interest in, a merger or other business combination involving the Company or any Subsidiary or the acquisition of any equity interest in, or a substantial portion of the assets of, the Company or any Subsidiary, other than the transactions contemplated by this Agreement. Notwithstanding the foregoing, if the Board of Directors of the Company receives an Acquisition Proposal which it determines in good faith will provide greater value to the Company and its stockholders than the transactions contemplated hereby (a "Superior Proposal"), the Board of Directors of the Company may, prior to the receipt of approval of the Merger from the stockholders of the Company, withdraw or modify its approval or recommendation of the Merger and this Agreement, approve or recommend a Superior Proposal or terminate this Agreement in accordance with Section 9.01(i) 32 but in each case, only at a time that is at least five business days after Buyer's receipt of written notice advising Buyer that the Board of Directors of the Company has received a Superior Proposal, specifying the material terms and conditions of such Superior Proposal and the names of the person or persons making such Superior Proposal. Within the five-business-day period referred to herein, Buyer may propose an improved transaction to the Board of Directors of the Company. SECTION 5.05. Notices of Certain Events. The Company shall promptly notify Buyer of: (a) any notice or other communication from any Person alleging that the consent of such Person is or may be required in connection with the transactions contemplated by this Agreement; (b) any notice or other communication from any governmental or regulatory agency or authority in connection with the transactions contemplated by this Agreement; and (c) any actions, suits, claims, investigations or proceedings commenced or, to the best of its knowledge threatened against, relating to or involving or otherwise affecting the Company or any Subsidiary which, if pending on the date of this Agreement, would have been required to have been disclosed pursuant to Section 3.12 or which relate to the consummation of the transactions contemplated by this Agreement. SECTION 5.06. Cooperative Efforts. (a) The Company agrees, and agrees to cause each of its Subsidiaries, to cooperate with and use its best efforts to assist Buyer in connection with the New Bond Offering, including but not limited to, participating in marketing efforts, participating in the preparation of disclosure relating to the Company and the Subsidiaries to be included in any related offering documents, and participating in the preparation of pro forma financial information relating to the Buyer and the Company on a combined basis. (b) The Company shall, and shall cause PS&T to, use its best efforts to consummate the Debt Offer on a timely basis. The Company shall keep Buyer apprised on a regular and timely basis of all significant developments relating to the Debt Offer and shall consult with Buyer prior to taking any significant actions or making any significant decisions in connection therewith. SECTION 5.07. Loans to Affiliated Persons. The Company shall cause all loans extended by the Company or any of the Subsidiaries to the officers and directors of the Company and the Subsidiaries on the date hereof to be repaid in 33 full, whether or not then due, prior to or concurrently with the consummation of the Merger and shall use its best efforts to cause all loans extended by the Company or any of the Subsidiaries to former officers and directors, current employees (except for loans to facilitate relocations of current employees as set forth on Schedule 3.20(a)) and former employees and associates of the Company to be repaid in full, whether or not then due, prior to or concurrently with the consummation of the Merger. Buyer consents to the discharge of such loans dollar for dollar through the surrender and cancellation without payment of the same principal amount of 7% Subordinated Notes of the Company referred to in Schedule 3.20(a). SECTION 5.08. Severance Package. Prior to the Effective Time, the Company shall adopt a severance payment plan having the terms set forth in Schedule 5.08 pursuant to documentation satisfactory to each of Buyer and the Company. Such severance plan shall be adopted in lieu of and shall replace any existing severance payment plan covering any current or future employees of the Company and its Subsidiaries. SECTION 5.09. Proceeds of Convertible Note. The Company shall make $4,600,000 of the proceeds of the Convertible Note available to PS&T immediately upon receipt of such proceeds. PS&T shall apply the $4,600,000 received from the Company in accordance herewith to pay down its debt under the revolving credit facility described in the Amended and Restated Senior Loan Agreement dated as of November 8, 1993, as amended, among PS&T, the lenders listed therein and General Electric Capital Corporation, as Agent (the "PS&T Credit Agreement"). PS&T further agrees to borrow under the PS&T Credit Agreement only after reasonable consultation with Buyer in the event that immediately following such borrowing, less than $4,600,000 of undrawn capacity for borrowing would remain available to PS&T. ARTICLE 6 COVENANTS OF BUYER AND MERGER SUBSIDIARY Each of Buyer and Merger Subsidiary, jointly and severally, agrees that: SECTION 6.01. Obligations of Merger Subsidiary. Buyer will take all action necessary to cause Merger Subsidiary to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in this Agreement. 34 SECTION 6.02. Voting of Shares. Buyer agrees to vote all Shares beneficially owned by it in favor of adoption of this Agreement at the Company Stockholder Meeting. SECTION 6.03. Director and Officer Liability. Each of the Surviving Corporation and PS&T will, pursuant to provisions in their respective certificates of incorporation and by-laws, indemnify and hold harmless the present and former officers and directors of the Company and PS&T, respectively, in respect of acts or omissions occurring while such persons are officers and directors to the same extent as is provided under each of the Company's and PS&T's, respectively, certificate of incorporation and bylaws in effect on the date hereof, and Buyer will not amend, repeal or modify such provisions in any manner that would adversely affect the rights thereunder of such persons; provided that such indemnification shall be subject to any limitation imposed from time to time under applicable law. For four years after the Effective Time, Buyer will cause each of the Surviving Corporation and PS&T, respectively, to use its best efforts to provide officers' and directors' liability insurance in respect of acts or omissions occurring prior to the Effective Time covering each such Person currently covered by the Company's and PS&T's officers' and directors' liability insurance policy on terms with respect to coverage and amount no less favorable in the aggregate than those of the applicable policy in effect on the date hereof, provided that in satisfying its obligation under this Section, Buyer shall not be obligated to cause the Surviving Corporation or PS&T to purchase an amount of such insurance in excess of the amount that can be purchased for premiums of 120% of the amount per annum the Company or PS&T paid in its last full fiscal year, which amount has been disclosed to Buyer. SECTION 6.04. Commitment Letters and Financing Agreements. Buyer (i) will not amend or otherwise modify the Commitment Letters in any material respect adverse to Buyer or the Company, or grant any waivers with respect thereto, without the prior consent of the Company, (ii) will provide the Company with drafts of the Financing Agreements as soon as they are provided by Lender or its counsel, (iii) will use its best efforts to obtain the Financing and (iv) will inform the Company in writing within five business days of its becoming aware of any facts or circumstances that might reasonably be expected to result in (x) the Commitment Letters being terminated or any of the conditions therein not being satisfied, or (y) the amount of the Financing to be provided pursuant to the Commitment Letters or the Financing Agreements not being sufficient to complete all of the transactions contemplated hereby. SECTION 6.05. Repurchase of Bonds. In the event that the consummation of the Merger or the drawing of funds under the Financing Agreements would be reasonably likely to violate or cause an event of default under the Tekni-Plex 35 Indenture, Buyer shall, at the earliest practicable time following Buyer's obtaining knowledge thereof, notify the Company of such fact and commence a combined consent solicitation and offer to purchase any and all of the 11 1/4% Senior Subordinated Notes due 2007 issued thereunder. The documentation for such offer and consent solicitation, including without limitation the conditions thereto, shall be reasonably satisfactory to the Company, and Buyer shall take all actions reasonably necessary in connection therewith to obtain the consent of holders of the principal amount of notes which would be sufficient to amend or eliminate those provisions of the Tekni-Plex Indenture which would be contravened by the consummation of the Merger. ARTICLE 7 COVENANTS OF BUYER AND THE COMPANY The parties hereto agree that: SECTION 7.01. Best Efforts. Subject to the terms and conditions of this Agreement, each party will use its best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate the transactions contemplated by this Agreement. SECTION 7.02. Certain Filings. The Company and Buyer shall cooperate with one another (a) in connection with the preparation of the Company Disclosure Documents and (b) in determining whether any action by or in respect of, or filing with, any governmental body, agency or official, or authority is required, or any actions, consents, approvals or waivers are required to be obtained from parties to any material contracts, in connection with the consummation of the transactions contemplated by this Agreement and (c) in seeking any such actions, consents, approvals or waivers or making any such filings, furnishing information required in connection therewith or with the Company Disclosure Documents and seeking timely to obtain any such actions, consents, approvals or waivers. SECTION 7.03. Public Announcements. Buyer and the Company will consult with each other before issuing any press release or making any public statement with respect to this Agreement and the transactions contemplated hereby and, except as may be required by applicable law, any policy or regulation of the Nasdaq Stock Market or the fiduciary duties of the Company's Board of 36 Directors under Delaware Law, will not issue any such press release or make any such public statement prior to such consultation. SECTION 7.04. Further Assurances. At and after the Effective Time, the officers and directors of the Surviving Corporation will be authorized to execute and deliver, in the name and on behalf of the Company or Merger Subsidiary, any deeds, bills of sale, assignments or assurances and to take and do, in the name and on behalf of the Company or Merger Subsidiary, any other actions and things to vest, perfect or confirm of record or otherwise in the Surviving Corporation any and all right, title and interest in, to and under any of the rights, properties or assets of the Company acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger. ARTICLE 8 CONDITIONS TO THE MERGER SECTION 8.01. Conditions to the Obligations of Each Party. The obligations of the Company, Buyer and Merger Subsidiary to consummate the Merger are subject to the satisfaction of the following conditions: (a) this Agreement shall have been adopted by the stockholders of the Company in accordance with Delaware Law; (b) any applicable waiting period under the HSR Act relating to the Merger shall have expired; (c) no provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit the consummation of the Merger; (d) all actions by or in respect of or filings with any governmental body, agency, official, or authority domestic or foreign, required to permit the consummation of the Merger including without limitation, filing a certificate of merger pursuant to Delaware Law, and any filings required pursuant to ISRA, the substance of all of which is reasonably satisfactory to the Company and the Buyer, shall have been taken, made or obtained. 37 SECTION 8.02. Conditions to the Obligations of Buyer and Merger Subsidiary. The obligations of Buyer and Merger Subsidiary to consummate the Merger are subject to the satisfaction of the following further conditions: (a) (i) the Company shall have performed in all material respects all of its obligations hereunder required to be performed by it at or prior to the Effective Time, the representations and warranties of the Company contained in this Agreement and in any certificate or other writing delivered by the Company pursuant hereto shall be true when made and (x) in respect of those representations and warranties that are qualified as to materiality, shall be true at and as of the Effective Time as if made at and as of such time, any (y) in respect of those representations and warranties that are not so qualified, shall be true in all material respects at and as of the Effective Time as if made at and as of such time (in each case except to the extent that such representations and warranties speak as of an earlier date); provided that the accuracy of such representations and warranties at and as of the Effective Time shall be determined without reference to any actions, claims or proceedings brought against the Company or any Subsidiary arising out of or as a result of the actions taken or proposed to be taken by the Company and its Subsidiaries pursuant to Section 1.07 hereof ("Section 1.07 Claims") and (ii) Buyer shall have received a certificate signed by each of the Chief Executive Officer, the President and the Chief Financial Officer of the Company to the foregoing effect; (b) no court, arbitrator or governmental body, agency or official shall have issued any order, and there shall not be any statute, rule or regulation, restraining or prohibiting the consummation of the Merger or any of the transactions contemplated hereby or the effective operation of the business of the Company and the Subsidiaries after the Effective Time, and no proceeding which is likely to (i) prohibit, alter, prevent or materially delay the Merger, or (ii) except for any Section 1.07 Claims, prohibit, alter, prevent or materially delay the other transactions contemplated hereby shall have been instituted by any Person before any court, arbitrator or governmental body, agency or official and be pending; (c) Buyer shall have received a certificate signed by each of the President and the Chief Executive Officer of the Company to the effect that neither the Company nor any of its Subsidiaries has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(A)(ii) of the Code; 38 (d) Buyer has obtained sufficient financing on terms satisfactory to it to (i) provide the Intercompany Loans, (ii) pay the Merger Consideration and consummate the Merger, (iii) retire, if necessary, the currently outstanding 11 1/4% Senior Subordinated Notes due 2007 issued under the Tekni-Plex Indenture, (iv) pay related fees and expenses not to exceed $8 million in the aggregate, and (v) provide undrawn revolving lines of Credit as contemplated by the Commitment Letters; provided that (x) Buyer shall not be obligated to draw down the bridge loan contemplated in the Bridge Loan Commitment Letter prior to the later of January 31, 1998 or 15 business days after the stockholders of the Company shall have voted to approve the Merger; and (y) Buyer acknowledges that the terms of the Financing described in the Commitment Letters are reasonable and satisfactory to Buyer; (e) the transactions described in Sections 1.06 and 1.07 shall have been, or concurrently will be, consummated; (f) the Company shall have obtained the consents listed on Schedule 3.04 (except with respect to any debt of any Subsidiary that Buyer elects not to repay as permitted by Section 1.06(b)); (g) Buyer shall have received, in respect of any operations conducted in, and in respect of each facility or real property owned, leased or operated by the Company or any Subsidiary which is located in, the State of New Jersey, evidence of full compliance by the Company with the requirements of ISRA. Such evidence shall be in a form satisfactory to Buyer in its sole discretion and shall not impose upon Buyer, the Company or any Subsidiary any obligations or liabilities to which Buyer shall not have consented in writing prior to the Closing. (h) no change shall have occurred in the business, assets, liabilities, financial condition, capitalization, operations, results of operations or prospects of the Company or any Subsidiary and Buyer shall not have become aware of any facts not previously known by Buyer as of the date hereof that in either case, in the reasonable judgment of Buyer, have or are likely to have a material adverse significance with respect to the value of the Company and its Subsidiaries, taken as a whole, excluding (i) the transactions contemplated by the Merger Agreement, or (ii) any Section 1.07 Claims; and (i) Buyer shall have received all documents it may reasonably request relating to the existence of the Company and the Subsidiaries and 39 the authority of the Company for this Agreement, all in form and substance satisfactory to Buyer. SECTION 8.03. Conditions to the Obligations of the Company. The obligations of the Company to consummate the Merger are subject to the satisfaction of the following further conditions: (a) (i) Each of Buyer and Merger Subsidiary shall have performed in all material respects all of its obligations hereunder required to be performed by it at or prior to the Effective Time, the representations and warranties of Buyer and Merger Subsidiary contained in this Agreement and in any certificate or other writing delivered by Buyer or Merger Subsidiary pursuant hereto shall be true when made and (x) in respect of those representations and warranties that are qualified as to materiality, shall be true at and as to the Effective Time as if made at and as of such time, and (y) in respect of those representations and warranties that are not so qualified, shall be true in all material respects at and as of the Effective Time as if made at and as of such time (in each case except to the extent that such representations and warranties speak as of an earlier date) and (ii) the Company shall have received a certificate signed by the Chief Executive Officer of Buyer to the foregoing effect; (b) no court, arbitrator or governmental body, agency or official shall have issued any order, and there shall not be any statute, rule or regulation, restraining or prohibiting the consummation of the Merger and no proceeding which is likely to (i) prohibit, alter, prevent or materially delay the Merger, or (ii) except for any Section 1.07 Claims, prohibit, alter, prevent or materially delay the transactions contemplated hereby shall have been instituted by any Person before any court, arbitrator or governmental body, agency or official and be pending; and (c) the Company shall have received all documents that the Company shall have reasonably requested relating to the existence of Buyer and Merger Subsidiary and the authority of the Buyer and Merger Subsidiary to enter into this Agreement, the Commitment Letters and the Financing Agreements, all in form and substance satisfactory to the Company. 40 ARTICLE 9 TERMINATION SECTION 9.01. Termination. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time (notwithstanding any approval of this Agreement by the stockholders of the Company): (a) by mutual written consent of the Company and Buyer; (b) by either the Company or Buyer, if the Merger has not been consummated by March 31, 1998; (c) by either the Company or Buyer, if there shall be any law or regulation that makes consummation of the Merger illegal or otherwise prohibited or if any judgment, injunction, order or decree enjoining Buyer or the Company from consummating the Merger is entered and such judgment, injunction, order or decree shall become final and nonappealable; or (d) by Buyer, if any Person, entity or "group" (as defined in Section 13(d)(3) of the Exchange Act) other than Buyer or Merger Subsidiary acquires beneficial ownership of 50% or more of the outstanding Shares; (e) by Buyer, if prior to the Effective Time, the Board of Directors of the Company shall have withdrawn or materially modified its approval or recommendation of the Merger or this Agreement, recommended another Acquisition Proposal or entered into a definitive agreement or agreement in principle with respect to another Acquisition Proposal, or resolved to do any of the foregoing; (f) by Buyer, if prior to the consummation of the Merger, a tender or exchange offer for some or all of the Shares shall have been publicly proposed to be made or shall have been made by another person, or it shall have been publicly disclosed or Buyer shall have otherwise learned that any person, entity or "group" (as defined in Section 13(d)(3) of the Exchange Act) other than Buyer or Merger Subsidiary shall have acquired or proposed to acquire beneficial ownership of more than 20% of any class or series of capital stock of the Company (including the Shares), through the acquisition of stock, the formation of a group or otherwise, or shall have been granted any option, right or warrant, conditional or 41 otherwise, to acquire beneficial ownership of more than 20% of any class or series of capital stock of the Company (including the Shares); (g) by either Buyer or the Company, if the Company Stockholder Meeting shall have been held and the stockholders of the Company shall have failed to approve and adopt this Agreement and the Merger at such meeting; (h) by either Buyer or the Company, if Buyer shall have received any communication from the Department of Justice or Federal Trade Commission (each an "HSR Authority") (which communication shall be confirmed to the other parties by the HSR Authority) that causes such party to reasonably believe that any HSR Authority has authorized the institution of litigation challenging the transactions contemplated by this Agreement under the U.S. antitrust laws, which litigation will include a motion seeking an order or injunction prohibiting the consummation of any of the transactions contemplated by this Agreement; and (i) by the Company, if (x) the Board of Directors of the Company concludes in good faith, based on written advice from outside counsel, that, in order to prevent the Board of Directors of the Company from breaching its fiduciary duties to the stockholders of the Company, it must withdraw or materially modify its approval or recommendation of the Merger or this Agreement, and it withdraws or materially modifies such approval or recommendation, (y) the Company complies with its obligations under Section 5.04, and (z) the Company pays all amounts due to Buyer pursuant to Section 10.04(a) in advance of such termination. At least two business days prior to terminating pursuant to this Section 9.01(i), the Company shall notify Buyer of its intention to terminate pursuant to this Section 9.01(i) and shall request that Buyer submit the amount of its costs and expenses payable under section 10.04(a). The party desiring to terminate this Agreement pursuant to clauses 9.01(b), 9.01(c), 9.01(d), 9.01(e), 9.01(f), 9.01(g), 9.01(h) or 9.01(i) shall give written notice of such termination to the other party in accordance with Section 10.01. SECTION 9.02. Effect of Termination. If this Agreement is terminated pursuant to Section 9.01, this Agreement shall become void and of no effect with no liability on the part of any party hereto, except that the agreements contained in Section 10.04 shall survive the termination hereof. 42 ARTICLE 10 MISCELLANEOUS SECTION 10.01. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including telecopy or similar writing) and shall be given, if to Buyer or Merger Subsidiary, to: Dr. F. Patrick Smith Chairman and Chief Executive Officer Tekni-Plex, Inc. 201 Industrial Parkway Somerville, New Jersey 08876 Telecopy: (908) 722-4967 with a copy to: Phillip R. Mills Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 Telecopy: (212) 450-4800 if to the Company or PS&T, to: Fred W. Broling Chairman of the Board and Chief Executive Officer PureTec Corporation 65 Railroad Avenue Ridgefield, New Jersey 07657 Telecopy: (201) 941-0602 with a copy to: David P. Falck Winthrop, Stimson, Putnam & Roberts One Battery Park Plaza New York, New York 10004-1490 Telecopy: (212) 858-1500 or such other address or telecopy number as such party may hereafter specify for the purpose by notice to the other parties hereto. Each such notice, request or 43 other communication shall be effective (a) if given by telecopy, when such telecopy is transmitted to the telecopy number specified in this Section and the appropriate telecopy confirmation is received or (b) if given by any other means, when delivered at the address specified in this Section. SECTION 10.02. Survival of Representations and Warranties. The representations and warranties and agreements contained herein and in any certificate or other writing delivered pursuant hereto shall not survive the Effective Time or the termination of this Agreement except for the agreements set forth in Section 10.04. SECTION 10.03. Amendments; No Waivers. (a) Any provision of this Agreement may be amended or waived prior to the Effective Time if, and only if, such amendment or waiver is in writing and signed, in the case of an amendment, by the Company, Buyer and Merger Subsidiary or in the case of a waiver, by the party against whom the waiver is to be effective; provided that after the adoption of this Agreement by the stockholders of the Company, there shall be made no amendment or waiver that by law requires further approval by such stockholders without the further approval of such stockholders. (b) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 10.04. Expenses. (a) The Company and PS&T jointly and severally agree to pay Buyer, in immediately available funds, promptly, but in no event later than two business days, after (or, in the case of termination under Section 9.01(i), prior to) the termination of this Agreement pursuant to clauses (d), (e) or (i) of Section 9.01, (x) a fee of $10,000,000 and (y) reasonable and documented costs and expenses, not to exceed $5,000,000 in the aggregate, incurred by Buyer and its subsidiaries and their representatives in connection with the transactions contemplated by this Agreement, which costs and expenses shall include, without limitation, fees and expenses payable by the Company to the Lender pursuant to the Commitment Letters, the costs and expenses in connection with the New Bond Offering, and fees and expenses of counsel and costs and expenses of the due diligence investigations of the Company and its Subsidiaries; provided, that payment of any amounts by the Company or PS&T pursuant to this Section 10.04(a) shall constitute a complete accord and satisfaction of all claims pursuant to this Agreement that either Buyer or Merger Subsidiary may have against the Company or PS&T and all claims that the Company or PS&T may have against Buyer or Merger Subsidiary, arising out of such termination and 44 relating to this Agreement (it being understood that the foregoing shall not affect in any respect the Company's obligations under the Convertible Note or the Voting Agreement). (b) Subject to Section 10.04(a) and Section 10.04(c), all costs and expenses incurred in connection with this Agreement shall be paid by the party incurring such cost or expense. (c) In the event this Agreement is terminated as a result of Buyer having breached its obligations hereunder or as a result of Buyer's failure to obtain the Financing for any reason, in whole or in part, not related to the Company's or the Subsidiaries' actions and, in either case, all of the other conditions set forth in Sections 8.01 and 8.02 shall have been satisfied, Buyer shall pay the out-of-pocket costs and expenses incurred by the Company and its Subsidiaries solely in connection with the New Bond Offering. SECTION 10.05. Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, provided that no party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other parties hereto. SECTION 10.06. Governing Law. This Agreement shall be construed in accordance with and governed by the law of the State of Delaware. SECTION 10.07. Counterparts; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective when each party hereto shall have received counterparts hereof and of the Convertible Note signed by all of the other parties hereto and thereto. 45 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. PURETEC CORPORATION By: ______________________________ Name: Title: PLASTIC SPECIALTIES & TECHNOLOGIES, INC. By: ______________________________ Name: Title: TEKNI-PLEX, INC. By: ______________________________ Name: Title: P.T. HOLDING, INC. By: ______________________________ Name: Title: 46 Schedule 3.05 Options and Warrants
# Options/Warrants # Options/Warrants Range of # Options/Warrants Expiring in: In the Money Out of the Money Exercise Type of Security $0-$3.49 $3.50 and above Price 1997 1998 1999 2005 1995 INCENTIVE PLAN OPTIONS 795,000 $2.00 - $3.00 795,000 1,888,700 $3.00 - $4.00 37,000 1,851,700 216,666 $4.00 - $5.00 216,666 56,000 $5.00 - $6.00 56,000 92,000 $6.00 - $7.00 92,000 TOTAL: 3,048,366 2,683,700 364,666 37,000 3,011,366 =============================================================================== ========================== ======================== 1995 DIRECTOR $2.25 PLAN OPTIONS 120,000 120,000 TOTAL: 120,000 120,000 120,000 =============================================================================== ========================== ======================== NON-PLAN OPTIONS 491,000 $4.00 - $5.00 435,000 56,000 50,000 $5.00 - $6.00 50,000 25,000 $22.00 25,000 TOTAL: 510,000 566,000 566,000 =============================================================================== ========================== ======================== SETTLEMENT WARRANTS 449,878 $4.61 449,878 TOTAL: 449,878 449,878 449,878 =============================================================================== ========================== ======================== "APR" WARRANTS 116,444 $20 - $22 116,444 TOTAL: 116,444 116,444 116,444 =============================================================================== ========================== ======================== COAST RECYCLING WARRANTS 36,000 $22.00 36,000 TOTAL: 36,000 36,000 36,000 =============================================================================== ========================== ======================== SPP WARRANTS 100,000 10.50-12.00 100,000 TOTAL: 100,000 100,000 100,000 =============================================================================== ========================== ======================== TOTAL: 4,436,688 2,803,700 1,632,988 37,000 626,444 585,878 3,131,366 ========= ========= ========= ====== ======= ======= ========= 47 CROSS-REFERENCE TARGET LIST NOTE: Due to the number of targets some target names may not appear in the target pull-down list. (This list is for the use of the wordprocessor only, is not a part of this document and may be discarded.) ARTICLE/SECTION TARGET NAME ?.............................................co.oblig.appoint ?.................................................buy.desig.no ?..................................................comp.action ?....................................................file.14d9 ?................................................co.board.unan ?........................................................offer ?..............................................file.sec.tender ?...............................................offer.commence ?..............................................majority.of.bod ?..................................................co.no.nj.ct ?............................................severance.package ?.............................................buy.offer.comply ?..........................................real.prop.trans.tax ?..................................................amend.terms ?....................................................offer.art ?................................................no.union.cont ?................................................conv.debt.sec 1...................................................merger.art 1.01....................................................merger 1.01(a)..............................................surv.corp 1.01(b).......................................file.cert.merger 1.01(c), 1.01(d)...............................possess.all.rts 1.02...............................................conv.shares 1.02(a)........................................co.share.cancel 1.02(b).........................................sub.share.conv 1.02(c).........................................out.share.conv 1.03..................................................surr.pay ?....................................................directors 1.03(a)..............................................exc.agent 1.03(b).........................................jt.venture.aff 1.03(b)........................................holder.entitled 1.03(c)..........................................cert.endorsed 1.03(d).......................................no.furth.reg.shr 1.03(e)..........................................unclaimed.ret 1.03(f).........................................shares.ret.buy 1.04.........................................dissenting.shares 1.05.............................................stock.options 1.05(a)............................................emp.stk.can 1.06..............................................company.debt 1.06(a)...........................................senior.notes 1.06(b)..................................other.subsidiary.debt 1.07..........................................pst.min.interest 1.07..........................................pst.min.interest 1.08...............................................inter.loans 1.09.......................................upstream.guarantees 2................................................surv.corp.art 2.01..................................................cert.inc 2.02....................................................bylaws 2.03...................................................dir.off 3...................................................rep.war.co 3.01..................................................co.exist 3.02..................................................co.autho 3.03..............................................co.gov.autho 3.04................................................co.non.con 3.05....................................................co.cap 3.05(a).........................................no.out.shr.cap 3.05(b)........................................no.sec.conv.shr 3.05(c).............................................no.options 3.06....................................................co.sub 3.06(a)...............................................sub.corp 3.06(b).........................................co.own.sub.stk 3.06(b)(i)........................................nno.vtng.sec 3.06(b)(ii)..........................................no.rights 3.06(c).....................................corp.part.lim.liab 3.07............................................co.sec.filings 3.07(a).........................................co.del.buy.sec 3.07(b)............................................report.true 3.07(c)..........................................co.not.untrue 3.08...............................................co.fin.stmt 3.09..............................................co.disc.docs 3.09(a).........................................co.docs.comply 3.09(b)..........................................co.proxy.true 3.09(c).......................................co.sub.info.true 3.10...........................................co.abs.cert.chg 3.10(a)..........................................co.no.mat.adv 3.10(b)..........................................co.no.div.cap 3.10(c)........................................co.no.amend.sec 3.10(d)...........................................co.no.indebt 3.10(e).............................................co.no.lien 3.10(f).............................................co.no.loan 3.10(g)...........................................co.no.damage 3.10(h)............................................co.no.trans 3.10(i).........................................co.no.chg.acct 3.10(j)............................................co.no.sever 3.10(k).......................................co.no.labor.disp 3.11..........................................co.no.undis.liab 3.11(a)................................................co.liab 3.11(c), 3.11(d)...................................co.ord.liab 3.11(e)............................................co.liab.agt 3.12...................................................co.liti 3.13..................................................co.taxes 3.13(a)...............................................tax.defs 3.13(b)..............................co.has.filed.and.paid.tax 3.13(c)...............................no.tax.deficiency.unpaid 3.13(d)............................no.extention.or.pwr.of.atty 3.13(e)..............................co.not.member.tax.sharing 3.13(f).....................................tax.comp.accrue.ex 3.14..................................................co.erisa 3.14(a)..........................................emp.bene.plan 3.14(b).......................................no.multiemp.plan 3.14(c)..........................................emp.plan.qual 3.14(d).........................................no.con.cov.emp 3.14(e).........................................list.emp.sever 3.14(f)........................................excess.post.ret 3.14(g)........................................co.no.amend.emp 3.14(h)........................................emp.ben.dis.con 3.14(i).....................................true.complete.list 3.15.............................................labor.matters 3.15(a)(i)....................................neither.comp.sub 3.16...............................................co.comp.law 3.17.............................................co.finder.fee 3.18.............................................co.other.info 3.19................................................co.env.mat 3.19(a)..........................................co.except.10k 3.19(b).......................................co.no.env.invest 3.19(c).............................................co.env.def 3.20........................................material.contracts 3.20(a)...................................mat.contracts.except 3.20(a)(i)...........................................any.lease 3.20(a)(ii)......................................any.agreement 3.20(a)(iii).........................................any.sales 3.20(a)(iv)...................................any.partnerships 3.20(a)(ix)............................................any.agt 3.20(a)(v)........................................any.relating 3.20(a)(vi)...................................any.indebtedness 3.20(a)(vii)........................................any.option 3.20(a)(viii).......................................any.agency 3.20(a)(x)..........................................any.person 3.20(a)(xi)..........................................any.other 3.20(b)................................each.agreement.contract 3.20(c).................................except.ps&t.notes.comp 3.21................................................properties 3.21(a)...........................................company.prop 3.21(a)(i).....................................liens.disclosed 3.21(a)(iii)...................................liens.for.taxes 3.21(a)(iv)......................................liens.detract 3.21(b)........................................no.developments 3.21(c).............................................all.leases 3.21(d).............................................the.plants 3.21(e)..............................................buildings 3.21(f).........................................such.real.prop 3.22.............................................intellec.prop 3.22(a)....................................intellec.prop.sched 3.22(b)..........................................schedule.sets 3.22(c).............................................since.date 4..................................................rep.war.buy 4.01.................................................buy.exist 4.02.................................................buy.autho 4.03.............................................buy.gov.autho 4.04...............................................buy.non.con 4.05.........................................buy.sub.info.true 4.05.............................................buy.disc.docs 4.06............................................buy.finder.fee 4.07.............................................buy.financing 5.......................................................cov.co 5.01................................................co.conduct 5.01(a)........................................co.not.chg.cert 5.01(b)...........................................co.not.merge 5.01(c)............................................co.not.sell 5.01(d).....................................comp.sub.com.expen 5.01(h)...........................................co.not.agree 5.01(i).............................................co.not.lie 5.02..........................................co.stk.mtg.proxy 5.03............................................co.access.info 5.04...........................................co.other.offers 5.05..........................................co.notice.events 5.05(a)........................................co.consent.pers 5.05(b).....................................not.gov.reg.agency 5.05(c)...........................................note.actions 5.07...................................loan.affiliated.persons 5.09.................................proceeds.convertible.note 6......................................................cov.buy 6.01..........................................oblig.merger.sub 6.02.............................................voting.shares 6.04...................................commit.ltrs.finan.agree 6.05..........................................repurch.of.bonds 7...................................................cov.buy.co 7.01..............................................best.efforts 7.02...........................................certain.filings 7.03...........................................public.announce 7.04.............................................further.assur 8..............................................cond.merger.art 8.01...........................................cond.oblig.each 8.01(a)..........................................adopt.del.law 8.01(b)...........................................hsr.wait.exp 8.01(c)........................................no.law.prohibit 8.01(d).......................................actions.obtained 8.02...........................................cond.obl.buy.sub 8.02(a).......................................co.perf.all.oblig 8.02(b)........................................no.court.iss.ord 8.02(c).....................................co.not.897(c)(2).co 8.02(i)........................................buy.rec.all.docs 9......................................................term.art 9.01.......................................................term 9.01(a)..........................................mutual.consent 9.01(b)........................................offer.not.consum 9.01(c)..........................................merger.illegal 9.01(d)............................................acq.bene.own 9.01(e)............................................bod.approval 9.01(g)............................................meeting.held 9.01(h).....................................buyer.received.comm 9.01(i).......................................prev.breach.fiduc 9.02................................................effect.term 10......................................................misc.art 10.01....................................................notices 10.02...............................................surv.rep.war 10.03..............................................amend.waivers 10.03(a)..................................................signed 10.03(b).........................................delay.not.waive 10.04...................................................expenses 10.04(a)..............................................expenses.a 10.04(b)..............................................expenses.b 10.04(c)........................................agree.terminated 10.05...............................................succ.assigns 10.06..............................................governing.law 10.07.............................................counter.effect
EX-4.3 3 13% CONVERTIBLE SENIOR NOTE THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD EXCEPT IN COMPLIANCE THEREWITH. $ 5,000,000 PURETEC CORPORATION 13% Convertible Senior Note PureTec Corporation, a Delaware corporation (together with its successors and assigns, the "Issuer"), for value received hereby promises to pay to Tekni-Plex Inc., a Delaware corporation (together with its successors, transferees and assigns, the "Holder") the principal sum of Five Million Dollars ($ 5,000,000) (the "Original Principal Sum") by wire transfer of immediately available funds to the Holder's account (the "Bank Account") at a bank in the United States specified in writing by the Holder from time to time, on the Maturity Date, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest on the Original Principal Sum and on all accrued interest added to the Principal Sum on a quarterly basis (together the "Principal Sum") outstanding from time to time in like coin or currency, at the rates per annum set forth below, by wire transfer of immediately available funds to the Bank Account, from the date hereof, until payment in full of such amounts has been made. This Note shall bear interest, commencing on the date hereof, at a rate per annum (the "Interest Rate") equal to 13% and payable on the Maturity Date; provided that (i) in the event that either a registration statement or an application for listing on NASDAQ covering all of the Base Shares and the Make Whole Shares issuable upon conversion of the Note pursuant to Article 4 (the "Conversion Shares") has not been filed by the First Trigger Date, the Interest Rate shall be increased, commencing on such First Trigger Date, by an additional 2.5% per annum, (ii) in the event that a registration statement relating to the Conversion Shares has not been declared effective or the Conversion Shares have not been listed on NASDAQ by the Second Trigger Date, the Interest Rate shall be increased, commencing on such Second Trigger Date, by an additional 2.5% per annum and (iii) in the event that a registration statement relating to the Conversion Shares has not been declared effective or the Conversion Shares have not been listed on NASDAQ by the Third Trigger Date, the Interest Rate shall be increased, commencing on such Third Trigger Date, by an additional 2% per annum. Further, the Interest Rate shall be increased by an additional 2% per annum, commencing on the day an Event of Default (other than a failure to register or list the Conversion Shares in accordance with Article 6) occurs. All increases in the Interest Rate provided herein shall be separate and in addition to any other increase provided herein; provided that the Interest Rate shall not be increased at any time by more than 2% per annum due to the occurrence of more than one Event of Default (other than a failure to register or list the Conversion Shares in accordance with Article 6). Interest on this Note will be calculated on the basis of a 360-day year of twelve 30-day months. Accrued interest on this Note will be added to the Principal Sum quarterly, commencing on January 31, 1998. Notwithstanding anything herein to the contrary, the interest payable by the Issuer with respect to this Note shall not exceed the maximum amount permitted by applicable law and, to the extent that any payments in excess of such permitted amount are received by the Holder, such excess shall be considered payments in respect of the principal amount of this Note. All sums paid or agreed to be paid to the Holder for the use, forbearance or retention of the indebtedness of the Issuer to the Holder shall, to the extent permitted by applicable law, be amortized, prorated, allocated and spread throughout the full term of such indebtedness until payment in full of the principal so that the interest on account of such indebtedness shall not exceed the maximum amount permitted by applicable law. This Note is the duly authorized convertible senior note (the "Note") of the Issuer. This Note is a direct, unconditional, unsubordinated obligation of the Issuer ranking pari passu with all other senior obligations of the Issuer. This Note is transferable and assignable, in whole or in part, on or after the Second Trigger Date to one or more purchasers, provided that such transfer or assignment is made in compliance with the Securities Act of 1933, as amended, and any applicable state and foreign securities laws. The Issuer agrees to issue from time to time a replacement Note or Notes, in the form hereof and in such denominations as the Holder may request to facilitate such transfers and assignments. In addition, after delivery of an indemnity in form and substance reasonably satisfactory to the Issuer, the Issuer also agrees to issue a replacement Note if this Note has been lost, stolen, mutilated or destroyed. The Note shall be issuable only in registered form without coupons. No provision of this Note shall alter or impair the obligations of the Issuer, which are absolute and unconditional, to pay the principal of and interest on this Note at the place, times, and rate, and in the currency, herein prescribed. 2 ARTICLE 1 DEFINITIONS SECTION 1.01. Certain Terms Defined. The following terms shall have the respective meanings specified below. All accounting terms used herein and not expressly defined shall have the meanings given to them in accordance with U.S. generally accepted accounting principles as in effect from time to time. The terms defined in this Section 1.01 include the plural as well as the singular. "Acceleration Notice" has the meaning set forth in Section 3.01. "Affiliate" means, with respect to any party, any Person directly or indirectly controlling or controlled by or under direct or indirect common control with such party. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise, provided, however, that beneficial ownership of 10% or more of the voting securities of a Person shall be deemed to be control. "Asset Sale" means, with respect to the Issuer or any Subsidiary, the sale, lease, conveyance or other disposition (including, without limitation, by way of merger or consolidation, and whether by operation of law or otherwise) of any of the Issuer's or such Subsidiary's assets, whether owned on the date hereof or subsequently acquired, in one transaction or a series of related transactions. "Board of Directors" means the Board of Directors of the Issuer or any committee thereof duly authorized to act on behalf of such Board. "Burlington" means Burlington Resins, Inc, a Delaware corporation and a wholly-owned indirect Subsidiary of the Issuer. "Change of Control" with respect to a the Issuer or any Subsidiary means the occurrence of any of the following at any time after the date hereof: (i) any person or group (within the meaning of Rule 13d-1 under the Exchange Act) of persons shall have become the beneficial owner of more than 50% of the then outstanding voting securities of the Issuer or such Subsidiary; 3 (ii) a majority of the Board of Directors of the Issuer or such Subsidiary shall consist at such time of individuals other than (x) members of the Board of Directors of such Issuer or such Subsidiary on the date hereof and (y) other members of such Board of Directors recommended, elected or approved to succeed or become a director of such Issuer or such Subsidiary by a majority of such members referred to in clause (x) or by members so recommended, elected or approved; or (iii) the Board of Directors or the shareholders of the Issuer or such Subsidiary shall have approved the sale of all or substantially all the assets of such Issuer or such Subsidiary in one transaction or a series of related transactions. "Common Share Equivalent" means, with respect to any security of the Issuer and as of a given date, a number which is, (i) in the case of a share of Common Stock, one, (ii) in the case of all or a portion of any right, option, warrant or other security which may be exercised for a share or shares of Common Stock, the number of shares of Common Stock receivable upon exercise of such security (or such portion of such security) and (iii) in the case of any security convertible or exchangeable into a share or shares of Common Stock, the number of shares of Common Stock that would be received if such security were converted or exchanged on such date. "Common Stock" means any and all shares of common stock, par value $0.01 per share, of the Issuer. "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes, or other similar instruments, (iii) all obligations of such Person in respect of letters of credit or other similar instruments (or reimbursement obligations with respect thereto), (iv) all obligations of such Person to pay the deferred purchase price of property or services, except Trade Payables, (v) all obligations of such Person as lessee under capital leases, (vi) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person and (vii) all Debt of others Guaranteed by such Person. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. 4 "Event of Default" means any event or condition specified as such in Section 4.01 which shall have continued for the period of time, if any, therein designated. "Fair Market Value" means (except as otherwise provided in Section 4.01(a) or Section 4.01(c)) on any date for a share of Common Stock, (i) if share of Common Stock are the listed or admitted to trading on any national securities exchange or traded on any national market system, the average of the daily closing prices for the 10 trading days before such date, excluding any trades which are not bona fide, arm's length transactions. The closing price for each day shall be the last sale price on such date or, if no such sale takes place on such date, the average of the closing bid and asked prices on such date, in each case as officially reported on the principal national securities exchange or national market system on which such shares are then listed, admitted to trading or traded; (ii) if no shares of Common Stock are then listed or admitted to trading on any national securities exchange or traded on any national market system, the average of the reported closing bid and asked prices thereof on such date in the over-the-counter market as shown by the National Association of Securities Dealers automated quotation system or, if such shares are not then quoted in such system, as published by the National Quotation Bureau, Incorporated or any similar successor organization, and in either case as reported by any member firm of the NASDAQ Stock Market selected by the Holder; and (iii) if no shares of Common Stock are then listed or admitted to trading on any national securities exchange or traded on any national market system, and if no closing bid and asked prices thereof are then so quoted or published in the over-the-counter market, the Fair Market Value of a share of Common Stock shall be as mutually agreed by the Issuer and the Holder seeking a determination of Fair Market Value; provided that if the Issuer and such Holder are unable to mutually agree upon the Fair Market Value, the Issuer and such Holder shall, within five days from the date that either party determines that they cannot agree and so notifies the other party in writing, jointly retain an investment banking firm (a "Valuation Firm"), satisfactory to each of them. If the Issuer and such Holder are unable to agree on the selection of such a Valuation Firm within such five day period, the Issuer and 5 such Holder shall, within 20 days after expiration of such five day period, each retain a separate Valuation Firm (which Valuation Firm, in either case, shall not be the investment banking firm or accounting firm regularly retained by the Issuer or the Holder). If either the Issuer or the Holder fail to retain a Valuation Firm during such 20 day period, then the Valuation Firm retained by the Holder or the Issuer, as the case may be, shall alone take the actions described below. Such Valuation Firms shall select a third Valuation Firm (which Valuation Firm shall not be an investment banking firm regularly retained by the Issuer or the Holder) and the Valuation Firm so selected shall determine within 30 days of being retained the Fair Market Value of a share of Common Stock and deliver its opinion in writing to the Issuer and to the Holder as to such Fair Market Value of a share of Common Stock and deliver its opinion in writing to the Issuer and to the Holder as to such Fair Market Value. The determination so made shall be conclusive and binding on the Issuer and the Holder. The fees and expenses all Valuation Firms incur in performing the services contemplated by this paragraph (C) shall be paid by the Issuer. "First Trigger Date" means the 30th day following the termination of the Merger Agreement for any reason. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the forego ing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation of such other Person (whether arising by virtue of partnership arrangements, by agreement to keepwell, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation for the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Lien" means any mortgage, lien, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof and any agreement to give any security interest). 6 "Liquid Investments" shall mean (i) certificates of deposit maturing within 90 days of the acquisition thereof denominated in U.S. dollars and issued by a bank or trust company having combined capital and surplus of at least $500,000,000 and which has (or which is a Subsidiary of a bank holding company which has) publicly traded debt securities rated AA or higher by Standard and Poors Ratings Group, a division of the McGraw Hill Companies, Inc. ("S&P"), or Aa-2 or higher by Moody's Investors Service, Inc. ("Moody's"); (ii) obligations issued or guaranteed by the United States of America, with maturities not more than one year after the date of issue; and (iii) commercial paper with maturities of not more than 90 days and a published rating of not less than A-1 from S&P or P- 1 from Moody's. "Make Whole Date" means the day on which the Holder receives written notice of the occurrence of the following events: (i) a registration statement relating to the Conversion Shares is declared effective, (ii) the Conversion Shares are listed on NASDAQ and (iii) the Conversion Shares are otherwise freely transferable. "Maturity Date" means September 30, 1998. "Merger" has the meaning set forth in the Merger Agreement. "Merger Agreement" means the Agreement and Plan of Merger dated as of the date hereof among the Issuer, PS&T, the Holder and P.T. Holding, Inc., a wholly-owned subsidiary of the Holder. "NASDAQ" means the NASDAQ Stock Market. "Person" means an individual or a corporation, partnership, association, trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "PS&T" means Plastic Specialties & Technologies, Inc., a Delaware corporation and a 96%-owned indirect Subsidiary of the Issuer. "SEC" means the Securities and Exchange Commission. "Second Trigger Date" means the 60th day following the termination of the Merger Agreement for any reason. "Securities Act" means the Securities Act of 1933, as amended from time to time or any successor statute. 7 "Subsidiary" means, with respect to any Person, any corporation or other entity of which a majority of the capital stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by (i) such Person, (ii) such Person and one or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such Person. "Third Trigger Date" means the 90th day following the termination of the Merger Agreement for any reason. "Trade Payables" means accounts payable or any other indebtedness or monetary obligations created or assumed by the Issuer in the ordinary course of business in connection with the obtaining of goods and services. ARTICLE 2 COVENANTS SECTION 2.01. Corporate Existence. The Issuer shall not and shall not permit any Subsidiary to, without the written consent of the Holder, amend, alter or repeal, whether by merger, consolidation, combination, reclassification or otherwise, its Certificate of Incorporation or By-laws or any provision thereof (including the adoption of a new provision thereof). SECTION 2.02. Capital Stock. The Issuer shall not and shall not permit any Subsidiary to, without the written consent of the Holder: (a) issue or obligate itself to issue shares of any class of stock or any other security convertible into or exchangeable for shares of any class of stock except for (i) shares of Common Stock issuable upon exercise or conversion of warrants and options outstanding on the date hereof, (ii) shares issuable upon conversion of this Note and (iii) shares issued to the Issuer or any Subsidiary; or (b) authorize any liquidation, dissolution, recapitalization or reorganization, any merger or consolidation with or into any other person of the Issuer or any Subsidiary, any sale or transfer of all or substantially all of the assets of the Issuer or any of its Subsidiaries or any acquisition of a material amount of assets of any other person. SECTION 2.03. Limitation on Debt. The Issuer will not and will not permit any of its Subsidiaries to directly or indirectly create, incur, issue, assume, 8 guarantee or otherwise become directly or indirectly liable with respect to or become responsible for the payment of, contingently or otherwise, any Debt except for borrowings in the ordinary course of business by certain Subsidiaries under existing working capital facilities as such facilities are in effect today and, in the case of PS&T, in accordance with Section 2.12. SECTION 2.04. Limitation on Liens. The Issuer will not and will not permit any of its Subsidiaries to directly or indirectly create, incur, assume or suffer to exist any Lien upon any of its assets or properties now owned or hereafter acquired, or any income or profits therefrom, or assign or convey any right to receive income therefrom other than Liens arising in the ordinary course of business of the Issuer and its Subsidiaries which are not incurred in connection with the borrowing of money or the obtaining of advances or credit and which do not materially distract from the value of the Issuer's and its Subsidiaries' property. SECTION 2.05. Restricted Payments. The Issuer will not and will not permit any Subsidiary to, directly or indirectly: (a) declare or pay any dividends on any class of equity interest of the Issuer or such Subsidiary other than payments of dividends to the Issuer or any Subsidiary; (b) make any payment on account of, or set apart money for a sinking or other analogous fund for the purchase, redemption, or other retirement of any equity interest of the Issuer or such Subsidiary other than (i) payments to the Issuer or any Subsidiary and (ii) payments made to repurchase the equity interests of PS&T; (c) make any distribution in respect of any equity interest of the Issuer or such Subsidiary (including through mergers, liquidations or other transactions commonly known as leveraged buyouts) other than (i) a distribution to the Issuer or any Subsidiary, (ii) a distribution in respect of the equity interests of PS&T in connection with the merger of PS&T with or into a wholly-owned Subsidiary of the Issuer as contemplated by the Merger Agreement (the "Minority Interest Transaction") and (iii) distributions in respect of the Merger; (d) purchase, defease, redeem or otherwise retire any Debt issued by the Issuer or any Subsidiary other than the purchase of the 11.25% Senior Secured Notes due 2003 of PS&T and ordinary course reductions in borrowings under the working capital facilities described in Section 2.03; or 9 (e) make any investment, whether in cash or property or in obligations of the Issuer or any Subsidiary, other than Liquid Investments and the Minority Interest Transaction. SECTION 2.06. Limitations on Dividend and Other Payment Restrictions. The Issuer will not and will not permit any of its Subsidiaries to directly or indirectly create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction on any kind on the ability of any Subsidiary to (i) pay dividends or make any other distributions to the Issuer or any other Subsidiaries, (ii) pay a Debt owned to the Issuer or any other Subsidiary, (iii) make loans or advances to the Issuer or any other Subsidiary or (iv) transfer any of its properties or assets to the Issuer or any other Subsidiary, except for such encumbrances or restrictions existing under or by reason of (a) financing or credit agreements in effect as of the date of this Note or (b) this Note. SECTION 2.07. Asset Dispositions. The Issuer will not, and will not permit any of its Subsidiaries to, directly or indirectly, sell, lease, license or otherwise dispose of any material assets or property except (i) pursuant to existing contracts or commitments and (ii) inventory in the ordinary course of business consistent with past practice. SECTION 2.08. Limitation on Sale and Leaseback Transactions. The Issuer will not, and will not permit any of its Subsidiaries to, enter into any arrangement with any Person providing for the leasing by the Issuer or any such Subsidiary of any real property or tangible personal property which property has been or is to be sold or transferred by the Issuer or such Subsidiary to such Person in contemplation of such leasing. SECTION 2.09. Limitation on Transactions with Affiliates. The Issuer and its Subsidiaries will not, directly or indirectly, enter into any transaction or series of related transactions with or for the benefit of any of their respective Affiliates (other than payments under existing policies and arrangements for services rendered as employees or directors). SECTION 2.10. Cash Flow Management. (a) The Issuer shall not, and shall not permit any Subsidiary to, commit to make or make any capital expenditures without the prior written consent of the Holder, other than (x) in respect of commitments existing on the date hereof as disclosed in Schedule 5.01(d) to the Merger Agreement or (y) maintenance capital expenditures in the ordinary course of business and in an aggregate amount for clauses (x) and (y) on a combined basis not to exceed $100,000 per calendar month during the period beginning on November 1, 1997 and ending on March 31, 1998; and the Issuer will not and will not permit any Subsidiary to, commit to make any capital expenditure without the 10 prior written consent of the Holder to the extent that any such capital expenditures are payable after March 31, 1998. (b) The Issuer shall cause the aggregate dollar value (determined in accordance with generally accepted accounting principles applied on a consistent basis) of inventories comprising the asset base for the PS&T Credit Agreement (as defined in Section 2.12) and owned by PS&T or its Subsidiaries to remain at or below (i) $59 million during the month of November 1997, (ii) $60.4 million during the month of December 1997, (iii) $57 million during the month of January 1998, (iv) $55.5 million during the month of February 1998 and (v) $51.8 million during the month of March 1998. (c) The Issuer shall cause the aggregate accounts payable (determined in accordance with generally accepted accounting principles applied on a consistent basis but excluding fees and expenses arising out of the transactions contemplated by this Agreement) of the Issuer and its Subsidiaries on a consolidated basis (exclusive of accounts payable by Burlington Resins, Inc. and accounts payable by any European Subsidiaries) to remain at or to exceed (i) $17.5 million during the month of November 1997, (ii) $17.0 million during the month of December 1997, (iii) $21.5 million during the month of January 1998, (iv) $23.6 million during the month of February 1998 and (v) $24.1 million during the month of March 1998. SECTION 2.11. Current Debt Restrictions. Except to the extent waived by the Holder, the Issuer shall and shall cause each of its Subsidiaries to comply with all covenants and agreements contained in any instrument evidencing any Debt of the Issuer or such Subsidiary as such covenants and agreements are in effect as of the date hereof, whether or not such instruments are later amended, terminated or otherwise modified in any respect. SECTION 2.12. Use of Proceeds. The Issuer shall use the proceeds of the issuance and sale of the Note to repay certain receivables in an aggregate amount of $4,600,000 owed to PS&T; provided that the Issuer shall cause PS&T to apply such proceeds to pay down its Debt under the revolving credit facility described in the Amended and Restated Senior Loan Agreement dated as of November 8, 1993, as amended, among PS&T, the lenders listed therein and General Electric Capital Corporation, as Agent (the "PS&T Credit Agreement"); provided further that the Issuer shall cause PS&T to borrow under the PS&T Credit Agreement only after reasonable consultation with the Holder in the event that immediately following such borrowing, less than $4,600,000 in undrawn capacity for borrowing would remain available to PS&T. 11 SECTION 2.13. Merger Agreement. The Issuer will not, and will not permit any Subsidiary to (i) take or agree or commit to take any action that would make (x) any representation and warranty of the Issuer under the Merger Agreement that is qualified as to materiality inaccurate in any respect or (y) any representation and warranty that is not so qualified inaccurate in any material respect, in each case at, or as of any time prior to, the Effective Time (as defined therein) or (ii) omit or agree or commit to omit to take any action necessary to prevent any such representation or warranty from being inaccurate in any respect (or, with respect to any representation any warranty described in clause (y), in any material respect) at any such time. ARTICLE 3 EVENTS OF DEFAULT SECTION 3.01. Event of Default Defined; Acceleration of Maturity; Waiver of Default. In case one or more of the following Events of Default (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body) shall have occurred and be continuing: (a) default in the payment of any interest upon the Note as and when the same shall become due and payable, at maturity, upon redemption, by declaration or otherwise; or (b) default in the payment of all or any part of the principal of the Note as and when the same shall become due and payable, at maturity, upon redemption, by declaration or otherwise; or (c) failure on the part of the Issuer or its Subsidiaries duly to observe or perform any of the covenants or agreements on the part of the Issuer or its Subsidiaries contained in this Note or in the Merger Agreement; (d) any default shall occur under the terms of any Debt of the Issuer or any of its Subsidiaries; or (e) any event or condition shall occur which results in the acceleration of the maturity of any Debt of the Issuer or any of its Subsidiaries; or 12 (f) a judgment or order for the payment of money shall be rendered against the Issuer or any of its Subsidiaries other than judgement or order enforcing the payment obligations of the Issuer and its Subsidiaries under the Settlement Agreement and Mutual General Release of all Claims dated October 3, 1997 among Dalen Trading Co., Ozite Corporation and MGC, Inc.; or (g) a court having jurisdiction in the premises shall enter a decree or order for relief in respect of the Issuer or any of its Subsidiaries in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Issuer or any of its Subsidiaries or for any substantial part of the property of the Issuer or any of its Subsidiaries or ordering the winding up or liquidation of the affairs of the Issuer or any of its Subsidiaries; or (h) the Issuer or any of its Subsidiaries shall commence a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment or taking possession by a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Issuer or any of its Subsidiaries or for any substantial part of the property of the Issuer or any of its Subsidiaries, or the Issuer or any of its Subsidiaries shall make any general assignment for the benefit of creditors; (i) any representation or warranty made by the Issuer in the Merger Agreement or in any certificate, financial statement or other document delivered pursuant to the Merger Agreement shall prove to have been incorrect when made; (j) failure on the part of the Issuer to file a registration statement with respect to the Conversion Share's with the SEC on or prior to the First Trigger Date; (k) failure on the part of the Issuer to file a listing application with respect to the Conversion shares with NASDAQ on or prior to the First Trigger Date; (l) failure on the part of the Issuer cause a registration statement covering the Conversion Shares to become effective under the Securities Act on or prior to the Third Trigger Date; (m) failure on the part of the Issuer to list the Conversion Shares on NASDAQ on or prior to the Third Trigger Date; 13 (n) failure on the part of the Issuer to cause the Conversion Shares to be freely transferable on or prior to the Third Trigger Date; (o) a Change of Control of the Issuer or PS&T shall occur, other than pursuant to the Merger; then, and in each and every such case (other than an Event of Default specified in Section 3.01(g) or 3.01(h) hereof), the Holder, by notice in writing to the Issuer (the "Acceleration Notice"), may declare the entire Principal Sum of the Note and the interest accrued thereon to be due and payable immediately, and upon any such declaration the same shall become immediately due and payable; provided that if an Event of Default specified in Section 3.01(g) or 3.01(h) occurs, the Principal Sum of and accrued interest on the Notes shall become and be immedi ately due and payable without any declaration or other act on the part of any Holder. SECTION 3.02. Powers and Remedies Cumulative; Delay or Omission Not Waiver of Default . No right or remedy herein conferred upon or reserved to the Holder is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. No delay or omission of the Holder to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or an acquiescence therein; and every power and remedy given by the Note or by law may be exercised from time to time, and as often as shall be deemed expedient, by the Holder. ARTICLE 4 CONVERSION; REDEMPTION SECTION 4.01. Conversion Rights. The Holder shall have conversion rights as follows (the "Conversion Rights"): (a) Conversion at Option of Holder. This Note shall be convertible, in whole or in part, without the payment of any additional consideration by the 14 Holder, at the option of the Holder at any time after the Second Trigger Date and until payment of all amounts owed hereunder shall have been made in full, including without limitation after acceleration or maturity hereof into (i) such number of fully paid and nonassessable shares of Common Stock (the "Base Shares") as is determined by dividing the Principal Sum of the Note together with all accrued interest to the date of conversion, by $2.72, as adjusted in accordance with Article 5; plus (ii) such number of fully paid and nonassessable shares of Common Stock (the "Make Whole Shares") having a Fair Market Value equal to the Excess Amount determined as provided in subparagraph 4.01(c); provided that if the Holder sells the Make Whole Shares in bonafide sales transactions within three business days of receiving such Make Whole Shares the sale price of such Make Whole Shares shall be deemed to be the Fair Market Value of such Make Whole Shares. (b) Mechanics of Conversion. The Notes shall be converted in accordance with the following provisions: (i) In order to exercise the conversion option in subparagraph 4.01(a), the Holder of the Note shall surrender such Note at the office of the Issuer, with a written notice of election to convert, completed and signed, specifying the amount of the Principal Sum of the Note to be converted and the amount of accrued interest thereon, if any, to be converted. Unless the shares issuable on conversion are to be issued in the same name as the name in which such Note is registered, the Note shall be accompanied by an instrument of transfer, in form reasonably satisfactory to the Issuer, duly executed by the Holder or the Holder's duly authorized attorney and an amount sufficient to pay any transfer or similar tax. (ii) As promptly as practicable after the surrender by the Holder of the Note as aforesaid, the Issuer shall issue and shall deliver to such Holder, or on such Holder's written order to such Holder's transferee, a certificate or certificates for the whole number of shares of Common Stock issuable upon the conversion of such Notes in accordance with the provisions of this Section 4.01. (iii) Each conversion shall be deemed to have been effected immediately prior to the close of business on the date on which the Note shall have been surrendered and such notice received by the Issuer as aforesaid, and the person in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder of record of the shares of Common Stock represented thereby at such time on such date. All shares of Common Stock delivered upon conversion of the Notes will 15 upon delivery be duly and validly issued and fully paid and non-assessable, free of all liens and charges and not subject to any preemptive rights. Upon the surrender of the Note, in the event the Holder elects to convert the entire Principal Sum of and interest accrued on the Note, such Note shall no longer be deemed to be outstanding and all rights of a Holder with respect to such Note surrendered for conversion shall immediately terminate except the right to receive the Common Stock. In the event the Holder elects to convert the Note only in part, the Issuer shall as promptly as practicable after the surrender of the Note, issue and deliver to the Holder a new Note with a Principal Sum equal to the unconverted Principal Sum and accrued interest of such surrendered Note. (iv) Prior to the delivery of any securities which the Issuer shall be obligated to deliver upon conversion of the Notes, the Issuer shall comply with all applicable federal and state laws and regulations which require action to be taken by the Issuer. (c) Excess Amount. The "Excess Amount" shall be an amount equal to the excess, if any, of (i) the Principal Sum of the Note plus accrued interest over (ii) the Fair Market Value of the Base Shares on the Make Whole Date less any brokerage commissions, fees and expenses incurred in connection with the sale by the Holder of the Conversion Shares and less any expenses of the Holder described in Section 7.06; provided that if the Holder sells the Base Shares in bonafide sales transactions within three business days of receiving such Base Shares the sale price of such Base Shares shall be deemed to be the Fair Market Value of such Base Shares. (d) Reserved Shares. The Issuer shall at all times reserve and keep available, free from preemptive rights, for issuance hereunder all of its authorized but unissued shares of Common Stock. (e) Payment of Taxes. The Issuer will pay any and all documentary stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Common Stock on conversion of the Note pursuant hereto; provided that the Issuer shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of Common Stock in a name other than that of the Holder of the Note to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Issuer the amount of any such tax or has established, to the reasonable satisfaction of the Issuer, that such tax has been paid. 16 (f) Fractional Interests. In connection with the conversion of the Note, no fractions of shares of Common Stock shall be issued, but in lieu thereof the Issuer shall pay a cash adjustment in respect of such fractional interest, equal to such fraction multiplied by $2.72 multiplied by a fraction the numerator of which the unadjusted number of Base Shares and the denominator of which shall be the number of Base Shares as adjusted in accordance with Article 7. SECTION 4.02. Redemption. (a) In accordance with the provisions of this Section 4.02, the Issuer may at any time elect to redeem the Note, in whole but not in part, for an amount in cash equal to the Principal Sum of the Note plus accrued interest; provided that until the fifth business day following the Make Whole Date, the redemption price shall be the greater of (i) the Principal Sum of the Note plus accrued interest and (ii) the Fair Market Value of the Conversion Shares at that time, determined as though such Conversion Shares were registered in accordance with the Securities Act, were listed on NASDAQ and were otherwise freely transferable on such date. (b) In the event the Issuer elects to redeem the Note in accordance with Section 4.01(a), the Issuer shall send to the Holder not less than 5 business days before the date on which the Note will be redeemed (the "Redemption Date") written notice advising the Holder of the proposed redemption specifying the Redemption Date and the Principal Sum and accrued and uncapitalized interest to be repaid. (c) Notwithstanding its receipt of notice from the Issuer of a proposed redemption, the Holder shall continue to have available to it all of its rights hereunder, including its conversion rights pursuant to this Article 4, until the Redemption Date. ARTICLE 5 ANTI-DILUTION So long as this Note (or any portion thereof) is outstanding, the number of Base Shares issuable upon conversion shall be subject to change or adjustment as follows: SECTION 5.01. Common Stock Dividends, Subdivisions or Combinations. In case the Issuer shall (i) pay or make a dividend or other distribution to all holders of its Common Stock in shares of Common Stock, (ii) subdivide, split or reclassify the outstanding shares of its Common Stock into a larger number of 17 shares or (iii) combine or reclassify the outstanding shares of its Common Stock into a smaller number of shares, then in each such case the number of Base Shares shall be adjusted to equal the number of such shares to which the Holder of this Note would have been entitled upon the occurrence of such event had this Note been converted immediately prior to the happening of such event or, in the case of a stock dividend or other distribution, prior to the record date for determination of shareholders entitled thereto. An adjustment made pursuant to this Section 5.01 shall become effective immediately after such record date, in the case of a dividend or distribution, and immediately after the effective date, in the case of a subdivision, split, combination or reclassification. SECTION 5.02. Reorganizations or Reclassifications. In case of any capital reorganization or any reclassification of the capital stock of the Issuer (whether pursuant to a merger or consolidation or otherwise), this Note shall thereafter be exercisable for the number of shares of stock or other securities or property receivable upon such capital reorganization or reclassification of capital stock, as the case may be, by a holder of the number of shares of Common Stock into which this Note was exercisable immediately prior to such capital reorganization or reclassification of capital stock; and, in any case, appropriate adjustment shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the Holder of this Note to the end that the provisions set forth herein shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other securities or property thereafter deliverable upon the exercise of this Note. SECTION 5.03. Distributions of Assets or Securities Other Than Common Stock. In case the Issuer shall, by dividend or otherwise, distribute to all holders of its Common Stock shares of any of its capital stock (other than Common Stock), rights or warrants to purchase any of its securities (other than those referred to in Section 5.04), cash, other assets or evidences of its indebtedness, then in each such case the number of Base Shares shall be adjusted by multiplying such number immediately prior to the date of such dividend or distribution by a fraction, of which the numerator shall be the Fair Market Value per share of Common Stock at the record date for determining shareholders entitled to such dividend or distribution, and of which the denominator shall be such Fair Market Value per share less the fair market value (as determined in good faith by the Board of Directors of the Company; provided that if the Holder in its discretion does not agree with such determination, such fair market value shall be determined by a nationally recognized firm of investment bankers reasonably acceptable to the Issuer and the Holder, whose fees shall be paid by the Issuer) of the portion of the securities, cash, assets or evidences of indebtedness so distributed applicable to one share of Common Stock. 18 SECTION 5.04. Below Market Issuances or Distributions of Common Stock. In case the Issuer shall issue Common Stock (or options, rights, warrants or other securities convertible into or exchangeable or exercisable for shares of Common Stock, including options issued pursuant to the 1995 Disinterested Directors Stock Option Plan and the 1995 Stock Incentive Plan (the "Option Plans") at a price per share (or having an effective exercise, exchange or conversion price per share together with the purchase price thereof) less than the Fair Market Value per share of Common Stock on the date such Common Stock (or options, rights, warrants or other securities convertible into or exchangeable or exercisable for shares of Common Stock, including options issued pursuant to the Option Plans) is sold or issued (provided that no sale of securities pursuant to an underwritten public offering shall be deemed to be for less than Fair Market Value), then in each such case the number of Base Shares shall thereafter be adjusted by multiplying the such number immediately prior to the date of issuance of such Common Stock (or options, rights, warrants or other securities) by a fraction, the numerator of which shall be (x) the sum of (i) the number of Common Share Equivalents represented by all securities outstanding immediately prior to such issuance and (ii) the number of additional Common Share Equivalents represented by all securities so issued multiplied by (y) the Fair Market Value of a share of Common Stock immediately prior to the date of such issuance, and the denominator of which shall be (x) the product of (A) the Fair Market Value of a share of Common Stock immediately prior to the date of such issuance and (B) the number of Common Share Equivalents represented by all securities outstanding immediately prior to such issuance plus (y) the aggregate consideration received by the Issuer for the total number of securities so issued plus, (z) in the case of options, rights, warrants or other securities convertible into or exchangeable or exercisable for shares of Common Stock, the additional consideration required to be received by the Issuer upon the exercise, exchange or conversion of such securities; provided, however, that in the event that such rights, options or warrants are not so issued or expire unexercised, or in the event of a change in the number of shares of Common Stock to which the holders of such rights, options or warrants are entitled, the number of Base Shares shall again be adjusted to be the number of Base Shares which would then be in effect if such rights, options or warrants had never been issued, in the former event, or the number of Base Shares which would then be in effect if such holder had initially been entitled to such changed number of shares of Common Stock, in the latter event. An adjustment made pursuant to this Section 5.04 shall become effective immediately after the date such Common Stock or other security is sold or issued. For purposes of this Section 5.04, in the case of an issuance in the ordinary course of business consistent with past practice of any options, rights, warrants or other securities or any shares of Common Stock (whether treasury shares or newly issued shares) pursuant to the Fair Market Value of such shares of Common Stock (or of the shares of Common Stock issuable upon the exercise, 19 exchange or conversion of such options, rights, warrants or other securities) at the time such shares of Common Stock (or options, rights, warrants or other securities) are issued shall be deemed to be equal to the fair market value of such securities as determined pursuant to the provisions of such plan or program. Notwithstanding anything herein to the contrary, (1) no further adjustment to the number of Base Shares shall be made upon the issuance or sale of Common Stock pursuant to (x) the exercise of any options, rights or warrants or (y) the conversion or exchange of any convertible securities, if in each case the adjustment in the number of Base Shares was made as required hereby upon the issuance or sale of such options, rights, warrants or securities or no adjustment was required hereby at the time such option, right, warrant or convertible security was issued and (2) no adjustment to the number of Base Shares shall be made upon the issuance or sale of Common Stock (x) upon the conversion of the Note or (y) upon the exercise of any warrants or options existing on the date hereof, without regard to the exercise price thereof. For purposes of this Section 5.04, if the Issuer issues Common Stock (or options, rights, warrants or other securities convertible into or exchangeable or exercisable for shares of Common Stock) for consideration wholly or partially other than cash, including services rendered, the fair market value of such consideration and of such Common Stock (or options, rights, warrants or other securities, convertible into or exchangeable or exercisable for shares of Common Stock, including options issued pursuant to the Option Plans) issued in connection therewith shall be as determined in good faith by the Board of Directors of the Issuer; provided that if the Holder in its discretion does not agree with such determination, such fair market value shall be determined by a nationally recognized firm of investment bankers reasonably acceptable to the Issuer and the Holder, whose fees shall be paid by the Issuer. SECTION 5.05. Below Market Distributions or Issuances of Preferred Stock or Other Securities. In case the Issuer shall issue nonconvertible and nonexchangeable preferred stock (or other securities of the Issuer other than Common Stock or options, rights, warrants or other securities convertible into or exchangeable or exercisable for shares of Common Stock) at a price per share (or other similar unit) less than the Fair Market Value per share (or other similar unit) of such preferred stock (or other security) on the date such preferred stock (or other security) is sold (provided that no sale of preferred stock or other security pursuant to an underwritten public offering shall be deemed to be for less than its fair market value), then in each such case the number of Base Shares shall thereafter be adjusted by multiplying the number of Base Shares immediately prior to the date of issuance of such preferred stock (or other security) by a fraction, the numerator of which shall be the product of (i) the number of Common Share Equivalents represented by all securities outstanding immediately prior to such issuance and (ii) the Fair Market Value of a share of Common Stock immediately prior to the date of such issuance, and the denominator of which 20 shall be (x) the product of (A) the number of Common Share Equivalents represented by all securities outstanding immediately prior to such issuance and (B) the Fair Market Value of a share of the Common Stock immediately prior to the date of such issuance minus (y) the difference between (I) the aggregate Fair Market Value of such preferred stock (or other security) and (II) the aggregate consideration received by the Issuer for such preferred stock (or other security). An adjustment made pursuant to this Section 5.05 shall become effective immediately after the date such preferred stock (or other security) is sold. SECTION 5.06. Above Market Repurchases of Common Stock. If at any time or from time to time the Issuer or any Subsidiary thereof shall repurchase, by self-tender offer or otherwise, any shares of Common Stock of the Issuer (or any security convertible into or exercisable or exchangeable for shares of Common Stock) at a weighted average purchase price in excess of the Fair Market Value thereof, on the business day immediately prior to the earliest of (i) the date of such repurchase, (ii) the commencement of an offer to repurchase or (iii) the public announcement of either (such date being referred to as the "Determination Date"), the number of Base Shares shall be determined by multiplying the number of Base Shares immediately prior to such Determination Date by a fraction, the numerator of which shall be the product of (1) the number of Common Share Equivalents represented by all securities outstanding immediately prior to such Determination Date minus the number of Common Share Equivalents represented by the securities repurchased or to be purchased by the Issuer or any Subsidiary thereof in such repurchase and (2) the Fair Market Value of a share of Common Stock immediately prior to such Determination Date, and the denominator of which shall be (x) the product of (A) the number of Common Share Equivalents represented by all securities outstanding immediately prior to the Determination Date and (B) the Fair Market Value of a share of Common Stock immediately prior to such Determination Date minus (y) the sum of (I) the aggregate consideration paid by the Issuer in connection with such repurchase and (II) in the case of options, rights, warrants or other securities convertible into or exchangeable or exercisable for shares of Common Stock, the additional consideration required to be received by the Issuer upon the exercise, exchange or conversion of such securities. An adjustment made pursuant to this Section 5.06 shall become effective immediately after the effective date of such repurchase. SECTION 5.07. Above Market Repurchases of Preferred Stock or Other Securities. If at any time or from time to time the Issuer or any Subsidiary thereof shall repurchase, by self-tender offer or otherwise, any shares of nonconvertible and nonexchangeable preferred stock (or other securities of the Issuer other than Common Stock or options, rights, warrants or other securities convertible into or exchangeable or exercisable for shares of Common Stock), at a weighted average purchase price in excess of the Fair Market Value thereof, on the business day 21 immediately prior to the Determination Date, the number of Base Shares shall be determined by multiplying the number of Base Shares immediately prior to the Determination Date by a fraction, the numerator of which shall be the product of (i) the number of Common Shares Equivalents represented by all securities outstanding immediately prior to such Determination Date and (ii) the Fair Market Value of a share of Common Stock immediately prior to such Determination Date, and the denominator of which shall be (x) the product of (A) the number of Common Share Equivalents represented by all securities outstanding immediately prior to such Determination Date and (B) the Fair Market Value of a share of Common Stock immediately prior to such Determination Date minus (y) the difference between (I) the aggregate consideration paid by the Issuer in connection with such repurchase and (II) an aggregate Fair Market Value of such preferred stock (or other security). An adjustment made pursuant to this Section 5.07 shall become effective immediately after the effective date of such repurchase. SECTION 5.08. No Impairment . The Issuer will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Issuer, but will at all times in good faith assist in the carrying out of all the provisions of this Article 5 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the Holder against impairment. SECTION 5.09. Certificate as to Adjustments. . Upon the occurrence of each adjustment or readjustment of the number of Base Shares pursuant to this Article 5, the Issuer at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to the Holder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Issuer shall, upon the written request at any time of the Holder, furnish or cause to be furnished to the Holder a like certificate setting forth (1) such adjustments and readjustments and (2) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of this Note. SECTION 5.10. Notices. (a) In the event that the Issuer shall propose at any time to effect any transaction of the type described in this Article 5 hereof or to take any similar extraordinary corporate action affecting the Issuer's capital stock, then, in connection with each such event, the Issuer shall send to the Holder at least 10 days prior to (x) in the case of a dividend or other distribution, the applicable record date, a notice specifying the record date for purposes of such dividend or distribution and the date on which such dividend or other distribution 22 is to be made, and (y) in any other case, the date on which such event is to become effective or the first date on which the Issuer intends to effect any such transaction, as the case may be, in each case specifying in reasonable detail what the transaction or event consists of and, if applicable, the aggregate amount or value of any cash or property proposed to be distributed, paid, purchased or received by the Issuer in connection therewith. (b) Unless notice is otherwise required pursuant to Section 5.10(a) hereof, the Issuer shall send written notice to the Holder immediately upon any public announcement with respect to an open market repurchase program for, any self-tender offer for and any other repurchase of shares of Common Stock. ARTICLE 6 REGISTRATION AND LISTING SECTION 6.01. Registration Rights. (a) The Issuer shall use its best efforts to cause a registration statement covering the Conversion Shares to be declared effective under the Securities Act and to list such Conversion Shares on NASDAQ as soon as practicable following the termination of the Merger Agreement but in no event later than the Third Trigger Date. On or prior to the First Trigger Date, the Issuer will prepare and file with the SEC a registration statement with respect to the Conversion Shares. The Issuer shall use its best efforts cause such registration statement to be declared effective on or prior to the Third Trigger Date and to have such Registration Statement remain effective under the Securities Act until the Conversion Shares are transferred by the Holder under such registration statement or the Note is repaid in full in cash, but in no event later than twelve months following the effective date of such registration statement (the "Registration Period"). In addition, the Issuer shall use its best efforts to register or qualify the Conversion Shares under the securities or Blue Sky laws of each jurisdiction within the United States in which such registration or qualification is necessary in connection with the issuance and delivery of such Conversion Shares to the Holder of the Note on or prior to the Third Trigger Date. (b) In connection with the registration and qualification referred to in Section 6.01(a), the Issuer covenants and agrees: (i) as expeditiously as possible, to prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective throughout the Registration Period; 23 (ii) as expeditiously as possible, to take such action as may be necessary or desirable to maintain the registration and qualification of the Conversion Shares under the securities or Blue Sky laws of the jurisdictions referred to in Section 6.01(a); and (iii) to pay all expenses incurred by the Issuer in complying in with this Article 6, including (A) all registration and filing fees, (B) all printing expenses, (C) all fees and disbursements of its counsel and independent public accountants and (D) all Blue Sky fees and expenses (including fees and disbursements of counsel). (c) The obligations of the Issuer under this Section 6.01 are conditioned upon the Holder furnishing to the Issuer, on a timely basis, such information relating to the Holder as may be required to be included in the registration statement relating to the Conversion Shares under applicable securities laws, and to otherwise cooperate with the Issuer in the preparation and filing of such registration statement. SECTION 6.02. Indemnification by the Issuer. The Issuer agrees to indemnify and hold harmless each of the Holder, its officers, directors and agents, and each Person, if any, who controls such Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus relating to the Conversion Securities (as amended or supplemented if the Issuer shall have furnished any amendments or supplements thereto) or any preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information furnished in writing to the Issuer by the Holder or on the Holder's behalf expressly for use therein; provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of the Holder from whom the person asserting any such loss, claim, damage or liability purchased the Conversion Shares if (i) it is determined that it was the responsibility of the Holder to provide such person with a current copy of the prospectus, (ii) the Holder had been furnished with copies of such current prospectus within a reasonable time prior to such purchase, and (iii) such current copy of the prospectus would have cured the defect giving rise to such loss, claim, damage or liability. The Issuer also agrees to indemnify any underwriters of the Conversion Shares, their officers and directors and each person who controls such 24 underwriters on substantially the same basis as that of the indemnification of the Holder provided in this Section 6.02. SECTION 6.03. Indemnification by Holder. The Holder agrees to indemnify and hold harmless the Issuer, its officers, directors and agents and each Person, if any, who controls the Issuer within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Issuer to the Holder, but only with reference to information related to the Holder furnished in writing by the Holder or on the Holder's behalf expressly for use in any registration statement or prospectus relating to the Conversion Shares, or any amendment or supplement thereto, or any preliminary prospectus; provided that the liability of the Holder to the Issuer and its officers, directors, agents and control persons set forth in this Section 6.03 shall be limited to the net proceeds received by the Holder as a result of his or its sale of Conversion Shares pursuant to such registration statement or prospectus (including amendments and supplements thereto). In case any action or proceeding shall be brought against the Issuer or its officers, directors or agents or any such controlling person, in respect of which indemnity may be sought against the Holder, the Holder shall have the rights and duties given to the Issuer, and the Issuer or its officers, directors or agents or such controlling person shall have the rights and duties given to the Holder, by the preceding paragraph. Notwithstanding the foregoing, the Holder also agrees to indemnify and hold harmless the underwriters of the Conversion Shares, their officers and directors and each person who controls such underwriters on substantially the same basis as that of the indemnification of the Issuer provided in this Section 6.03. SECTION 6.04. Conduct of Indemnification Proceedings. In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to Section 6.02 or 6.03, such person (an "Indemnified Party") shall promptly notify the person against whom such indemnity may be sought (an "Indemnifying Party") in writing and the Indemnifying Party shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Party, and shall assume the payment of all fees and expenses. In any such proceeding, any Indemnified Party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (i) the Indemnifying Party and the Indemnified Party shall have mutually agreed to the retention of such counsel, (ii) the named parties to any such proceeding (including any impleaded parties) include both the Indemnified Party and the Indemnifying Party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them as reasonably determined by the Indemnified Party or (iii) the Indemnifying Party fails to retain counsel or diligently pursue the defense. It is 25 understood that the Indemnifying Party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) at any time for all such Indemnified Parties, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Indemnified Parties, such firm shall be designated in writing by the Indemnified Parties. The Indemnifying Party shall not be liable for any settlement of any proceeding effected without its consent, but if settled with such consent, or if there be a final judgment for the plaintiff, the Indemnifying Party shall indemnify and hold harmless such Indemnified Parties from and against any loss or liability (to the extent stated above) by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an Indemnified Party shall have requested an Indemnifying Party to reimburse the Indemnified Party for fees and expenses of counsel as contemplated by the third sentence of this paragraph, the Indemnifying Party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 business days after receipt by such Indemnifying Party of the aforesaid request and (ii) such Indemnifying Party shall not have reimbursed the Indemnified Party in accordance with such request prior to the date of such settlement. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending or threatened proceeding in respect of with any Indemnified Party is or could have been a party and indemnity could have been sought hereunder by such Indemnified Party, unless such settlement includes an unconditional release of such Indemnified Party from all liability arising out of such proceeding. SECTION 6.05. Contribution. If the indemnification provided for in this Article 6 is unavailable to the Indemnified Parties in respect of any losses, claims, damages or liabilities referred to herein, then each such Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities (i) as between the Issuer and the Holder (subject to the limitations on liabilities of the Holder to the Issuer set forth in the proviso contained in Section 6.03 hereof) on the one hand and the underwriters on the other, in such proportion as is appropriate to reflect the relative benefits received by the Issuer and the Holder on the one hand and the underwriters on the other from the offering of the Conversion Shares, or if such allocation is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits but also the relative fault of the Issuer and the Holder on the one hand and of the underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations and (ii) as between the Issuer on the one hand and the Holder on the other, in such proportion as is appropriate to reflect the relative 26 fault of the Issuer and of the Holder in connection with such statements or omissions, as well as any other relevant equitable considerations. The relative benefits received by the Issuer and the Holder on the one hand and the underwriters on the other shall be deemed to be in the same proportion as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Issuer and the Holder bear to the total underwriting discounts and commissions received by the underwriters, in each case as set forth in the table on the cover page of the prospectus. The relative fault of the Issuer and the Holder on the one hand and of the underwriters on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Issuer and the Holder or by the underwriters. The relative fault of the Issuer on the one hand and of the Holder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Issuer and the Holder agree that it would not be just and equitable if contribution pursuant to this Section 6.05 were determined by pro rata allocation (even if the underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an Indemnified Party as a result of the losses, claims, damages or liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 6.05, no underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Conversion Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, and the Holder shall not be required to contribute any amount in excess of the amount by which the total price at which the Conversion Shares of the Holder were offered to the public exceeds the amount of any damages which the Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 27 SECTION 6.06. Listing Rights. On or prior to the First Trigger Date, the Issuer will prepare and file with NASDAQ an application for listing the Conversion Shares. The Issuer will use its best efforts to cause the Conversion Shares to be listed and to remain listed on NASDAQ during the Registration Period. ARTICLE 7 MISCELLANEOUS SECTION 7.01. Modification of Notes. Any provision of this Note may be amended or waived with the written consent of the Issuer and the Holders of a majority of the Principal Sum of all of the Notes then outstanding; provided that no such amendment or waiver shall (a) extend the final maturity of the Note, or reduce the Principal Sum thereof, or reduce the rate or extend the time of payment of interest thereon, or reduce any amount payable on the redemption thereof, or change the conversion rate thereof, or impair or affect the rights of any Holder to institute suit for the payment thereof or adversely affect the ranking of the Note with respect to the outstanding Debt of the Issuer, in each such case, without the consent of each Holder of the Note so affected or (b) reduce the aforesaid percentage of Note, the consent of the Holders of which is required for any such amendment or waiver, without the consent of all of the Holders of Note. The Issuer shall promptly notify all Holders after the making of any amendment or waiver pursuant to this Section 7.01. SECTION 7.02. Notices. All notices and other communications required or permitted hereunder shall be in writing, shall be effective when given, and shall in any event be deemed to be given upon receipt or, if earlier, (a) five (5) days after deposit with the U.S. Postal Service or other applicable postal service, if delivered by first class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) one business day after the business day of deposit with Federal Express or similar overnight courier, freight prepaid or (d) one business day after the business day of facsimile transmission, if delivered by facsimile transmission with copy by first class mail, postage prepaid, and shall be addressed to each holder of record at his address appearing on the books of the corporation. SECTION 7.03. Governing Law. This Note shall be deemed to be a contract under the laws of the State of New York, and for all purposes shall be construed in accordance with the laws of said State, except as may otherwise be required by mandatory provisions of law. The parties hereto hereby waive presentment, demand, notice, protest and all other demands and notices in 28 connection with the delivery, acceptance, performance and enforcement of this Note, except as specifically provided herein. The Holder of this Note by accep tance hereof agrees to be bound by the provisions of the Notes which are expressly binding on the Holder. SECTION 7.04. Headings. The Section headings herein are for convenience only and shall not affect the construction hereof. SECTION 7.05. Specific Performance. The parties hereto agree that irreparable damage would occur in the event any provision of this Note is not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof in addition to any other remedy to which they are entitled at law or in equity. SECTION 7.06. Expenses; Indemnification. (a) The Issuer shall pay (i) all out-of-pocket expenses of the Holder, including fees and disbursements of counsel for the Holder, in connection with any waiver or consent hereunder or any amendment hereof or any Default or Event of Default hereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the Holder, including fees and disbursements of counsel, in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. (b) The Issuer agrees to indemnify the Holder, its affiliates and the directors, officers, agents and employees of the foregoing (each an "Indemnitee") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to or arising out of this Note or any actual or proposed use of proceeds the sale of this Note hereunder; provided that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee's own gross negligence or willful misconduct as determined by a court of competent jurisdiction. SECTION 7.07. Survival. Notwithstanding the surrender and cancellation of this Note in connection with the conversion of the Note, the covenants and agreements contained in Section 4.01 (other than Section 4.01(d)), Article 6 and Article 7 shall survive such surrender and cancellation and shall remain in full force and effect. 29 IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly executed. Dated: November 11, 1997 PURETEC CORPORATION By: ______________________________ Name: Title: 30 CROSS-REFERENCE TARGET LIST --------------------------- NOTE: Due to the number of targets some target names may not appear in the target pull-down list. (This list is for the use of the wordprocessor only, is not a part of this document and may be discarded.) ARTICLE/SECTION TARGET NAME - --------------- ----------- 1............................................definitions 1.01...............................certain.terms.defined ?..................................payment.conds.funding ?.............................payment.principal.interest 2.......................................covenants.issuer 2.01.................................corporate.existence 2.02.......................................capital.stock 2.02(a)..........................create.auth.issue.oblig 2.02(b)...........................auth.liquid.diss.recap ?............................redeem.purch.acquire.shares 2.03.....................................limitation.debt 2.04....................................limitation.liens 2.05...........................limitation.restr.payments 2.05(a)................................declare.pay.divid 2.05(b)...............................payment.account.of 2.05(c).........................distr.respect.equity.int 2.05(d).............................purch.defease.redeem 2.05(e)..................................make.investment 2.06..........................limit.divd.other.pmt.restr 2.07..................................asset.dispositions 2.08........................limitation.sale.leaseb.trans 2.09..............................limitation.trans.affil 2.10......................................cash.flow.mgmt 2.10(a)...............................comp.sub.com.expen 2.10(b)...............................dollar.value.below 2.10(c)..................................accts.pay.below 2.11......................................pst.burlington 2.12........................................use.proceeds 3.........................................events.default 3.01...............................event.default.defined 3.01(a)........................default.pmt.interest.note 3.01(b)...........................default.pmt.princ.note 3.01(c)..........................failure.observe.perform ?....................................failure.part.issuer 3.01(d).............................issuer.fail.make.pmt 3.01(f).............................issuer.fail.make.pmt 3.01(g)...............................court.decree.order 3.01(h)................................issuer.volun.case 3.02...............................powers.remedies.cumul ?...................................waiver.past.defaults 4.............................................conversion 4.01...................................conversion.rights 4.01(a).........................conversion.option.bidder 4.01(b).............................mechanics.conversion 4.01(b)(i)........................exer.conversion.option 4.01(b)(iii).................conversion.deemed.effective 4.01(b)(iv)....................prior.delivery.securities 4.01(c)....................................excess.amount 4.01(d)..................................reserved.shares 4.01(e)....................................payment.taxes 4.01(f).............................fractional.interests 4.02..........................................redemption 5..........................................anti.dilution 5.01...................................common.stock.divs 5.02......................................reorgs.reclass 5.03..............................dist.assets.secs.other 5.04..............................below.market.issuances 5.05..........................below.market.distributions 5.06............................above.market.repurchases 5.07........................above.market.reps.pref.stock 5.08.......................................no.impairment 5.09....................................cert.adjustments 5.10...........................................notices.1 6............................registration.listing.rights 6.01..........................................reg.rights 6.01(a)...................................prior.thir.day 6.01(b)....................................conn.reg.qual 6.01(b)(i)..............................prepare.file.sec 6.01(b)(ii).........................reg.qual.conv.shares 6.01(b)(iii)................pay.expenses.incurred.issuer 6.02.............................indemnification.company 6.03.............................indemn.holders.reg.secs 6.04.............................conduct.indemn.proceeds 6.05........................................contribution 7...................................................misc 7.01.........................................modif.notes 7.02.............................................notices 7.02(a)................................five.days.deposit 7.02(b)....................................upon.delivery 7.02(c)...........................one.business.day.fedex 7.02(d).............................one.business.day.fax 7.03.......................................governing.law 7.04............................................headings 7.06............................expenses.indemnification 7.07............................................survival EX-23.1 4 INDEPENDENT AUDITORS' CONSESNT Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-98266 of PureTec Corporation on Form S- 8 and Registration Statement No. 33-98190 on Form S-3 of our report dated November 13, 1997, appearing in this Annual Report on Form 10-K of PureTec Corporation for the year ended July 31, 1997. /s/ Deloitte & Touche LLP Parsippany, New Jersey November 13, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
5 1000 YEAR JUL-31-1997 AUG-01-1996 JUL-31-1997 6,745 0 57,890 1,154 54,568 3,962 104,111 15,744 311,823 101,851 129,504 0 0 315 66,862 311,823 315,334 0 248,419 288,717 1,959 0 19,749 4,909 3,131 1,778 (4,136) 0 0 (2,791) 0.09 0.09
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